A Biotech "Partner"

11/11/2005 12:00 am EST

Focus:

Michael Shulman

Editor, Short-Side Trader

A relatively new service under my coverage, ChangeWave Biotech Investor has quickly become one of my favorite newsletters. Editor Michael Shulman does an exceptional job of uncovering exciting opportunities in this complex arena. Here's a sample of his latest.

"American Pharmaceutical Partners (APPX NASDAQ) has two businesses, It is the world's largest manufacturer of generic cancer and critical-care injectables and is now a player in biotech. In January, the firm received FDA approval for its first proprietary drug, Abraxane. This new treatment for breast cancer uses a mature anti-cancer drug (paclitaxel) in a novel, nanoparticle-based, drug-delivery mechanism.

"APPX is technically the stepchild of parent company American BioScience, and both companies were essentially controlled by the same chairman. Early in 2004, Wall Street discovered this CEO was double-dipping. He was not just CEO and a majority owner, but his personal holding company was also going to get a profit split of up to 50% on sales of the new drug because he had invented the technology. As a result of these revelations, the stock was cut in half, to below $30.

"Why is this an opportunity? I have long speculated that the company will eventually split in two, with current management and the chairman keeping the cancer franchise and selling or spinning off the generics business. Comments by the CFO during the latest conference call indicated this may be happening sooner rather than later, and such a sale or spin-off should be quite beneficial to shareholders.

"The firm has a robust generics business, including over 150 oncology, anti-infective, and critical-care injectable treatments. In 2004, the business grew roughly 15% on the top line, and it should see this growth, or more, in 2006. Meanwhile, there are applications for 22 new generic drugs sitting at the FDA. Another 45 drugs are in development and will be submitted to the FDA in the next two years.

"The key proprietary drug at present is Abraxane, a treatment for late-stage, metastatic breast cancer built around paclitaxel, the treatment form of Taxol (the Lance Armstrong drug). Current forms of paclitaxel marketed by Bristol-Myers Squibb are highly toxic. The BMY drugs require pre-dosing of patients with drugs intended to counter the toxic effects of the treatments, and infusion can take as long as three hours. The average patient can manage only one dose per two to three weeks due to the toxicity of the drug.

"Abraxane, on the other hand, replaces the toxic chemicals with an albumin nanoparticle. This eliminates the harsh delivery ingredients and makes the drug easier to tolerate. Patients can be treated in 20 minutes without any pre-dosing and as often as three times per month. Clinical trial data recently released show Abarxane, for the first time, to be more efficacious than Taxol. In less than three full quarters of availability on the market, Abraxane now commands 17% market share of new patients and is trending up at a rapid rate. Net sales after royalties were $32 million.

"Wall Street has not been focused on the breakup of the company. But in its latest conference call, it was revealed that the firm paid a multi-million-dollar charge for consulting services. When asked by a Merrill Lynch analyst about this charge, the CFO referred to its as ‘financial services’. Does this really count for much? You bet. I think it suggests that the company will be split up or the generics business will be sold. But is this the only reason to own the company? Not at all.

"APPX recently announced a new trial for Abraxane in combination with a traditional chemotherapy (Herceptin) and the preliminary results of a trial using Abraxane in drug-eluting cardiac stents. Overall, I see tremendous operating leverage in the company given its heavy investment in Abraxane and further investment in a new nanoparticle manufacturing facility. The new drug is very profitable, even after royalties, and has boosted overall margins and profitability per dollar of revenue.

"The stock doubled when Abraxane was approved, cracked earlier in the year when the company ran into trouble in one of its manufacturing facilities, an issue to be resolved by year-end, and revenues and profits have disappointed but not because of Abraxane. This is a long-term play even though it has considerable short-term upside. I see a base building in the $43-$45 range. Look for this base-building to take hold and a solid climb back to $60-$66 in the next six to 12 months.

"If APPX sells the generics business or splits up, I see only upside for shareholders, although it is impossible to quantify. Based on the valuation of other oncology companies in this space, and the value of the generics business, the stock is worth between $75 and $90 if it splits up or the generics business is sold. Don't wait for dips. This is both a short- and a long-term play and you cannot go wrong right here. My target continues to be $100-$120. Expect a probable sale of the generics business or a split of the company within 18 months."

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