Sunday, March 26, 2006

American Pharmaceutical Partners (APPX) Analysis

Toddi Gutner from Business Week wrote an article titled - "Where to Go For Growth" in the March 27th issue. In this article, she profiled a handful of companies including APPX. Let us quickly take a look at APPX and then see what Toddi has got to say about this stock. We will then analyze the balance sheets to see if APPX is a buy at today's prices.

In the 1o-K, the company is described as follows:

"We are a pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. We believe that we are the only independent U.S. public company with a primary focus on the injectable oncology, anti-infective and critical care markets, and we further believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, or freeze-dried. We hold the exclusive North American right to sell Abraxane®, a proprietary nanoparticle injectable oncology product that is a patented formulation of paclitaxel. In January 2005, ABI’s New Drug Application, or NDA, for Abraxane® was approved by the U.S. Food and Drug Administration, or FDA, and we launched the product on February 7, 2005. Our wholly-owned subsidiary, Pharmaceutical Partners of Canada, Inc., markets injectable pharmaceutical products in Canada."

APPX is a majority owned subsidiary of American BioScience, Inc., a California corporation. At December 31, 2005, American BioScience owned 47,984,160 shares, or 66.2%, of APPX outstanding common stock. ABI is 98% owned by Patrick Soon-Shiong. APPX and ABI are merging to form a common company to be called ABBI. ABI owns world wide licensing for Abraxane - the cancer drug. The terms of the agreement are disclosed in the 10-K.

"On November 27, 2005, we entered into an agreement and plan of merger with American BioScience, Inc., or ABI, under which ABI will merge with and into us, with our company continuing as the surviving corporation. In the merger, holders of shares of ABI common stock will receive 86,096,523 shares of our common stock, plus the number of shares of our common stock held by ABI at the effective time of the merger (which was 47,984,160 shares as of December 31, 2005), less the number of shares of our common stock issuable after the effective time of the merger with respect to restricted stock units issued under the ABI restricted unit plan contemplated to be adopted by ABI under the merger agreement (with this number of shares of our common stock to be issued as part of the merger consideration, but to be issued to holders of ABI restricted stock units in cancellation of such units). The 47,984,160 shares of our common stock held by ABI prior to the merger and acquired by our company in connection with the merger will be cancelled without payment of any additional merger consideration. Upon completion of the merger, the former holders of ABI common stock, together with the holders of ABI restricted stock units, will be issued shares of our common stock representing approximately 83.5% of our common stock outstanding on a fully-diluted basis immediately after the merger. This percentage reflects only the shares to be issued in the merger but does not include any shares of our common stock held by individual ABI shareholders prior to the merger. In connection with the merger, our certificate of incorporation will be amended to (a) increase the authorized number of shares of our common stock to 350,000,000 and (b) change our name to “Abraxis BioScience, Inc.” Following the merger, our common stock will be traded and quoted on The Nasdaq National Market under the symbol “ABBI.”"

Toddi has this to say about this merger. "... Many analysts believe APP overpaid for ABS and they turned negative on the stock, but, says Morningstar analyst Brian Laegeler, "the underlying business hasnt been affected"". Furthermore, she projects the earnings and profitability to increase after the merger. Five year revenue growth is expected to be 33.4% and earnings growth of 61.8%. Morningstar estimates the stock to be selling 25% below its market value.

Obviously, the company's profit engine is Arbaxane. The 10-K had the following to say about Arbaxane (developed by ABI ) prospects.

ABI, which is responsible for the clinical development of Abraxane® under the license agreement, has embarked upon an aggressive and comprehensive clinical development plan to maximize the commercial potential of Abraxane® in cancers involving the breast, lung, prostate, ovary, cervix, head and neck, pancreas, stomach and skin. Approximately 77 Abraxane® clinical studies (including investigator-initiated studies) were planned or underway as of December 31, 2005 .

Let us look at the balance sheets to see how the company did in the past year. Although past performance is not indicator of the future, it does give some indication of how the company is doing.

Net sales increased 27% in 2005 from 2004. Sales increased by 14% in 2004 compared to 2003. The operating income increased by 27% and 69% respectively in the two years. The stock holders equity a.k.a book value increased by 40% year over year in 2005 compared to 2004.

The only damper is the pending merger which will cause the company to issue 134 million new shares to take the total to 206 million shares altogether. This will take the market cap of the combined company to 5.84 billion if the stock price stays at the current levels. If we assume that ABI doesnt add anything to the revenues by merging but only provides full access to the cancer drug. This means the P/E of the stock will jump to 87 from its current levels of 27. If the stock jumps to 40 as suggested by Business Week, the P/E will jump to 110. Also, the merger will cause APPX not to pay the royalty and split its profits with ABI. With 90% growth in oncology products year over year, the elimination of royalty payments should help reduce the P/E to below 100.

Still, if Business Week analysis is to be believed, the stock is selling at a discount to its fair value at current levels. The article assumes upside for the merged company because of the higher profit margins for the cancer drung.

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