Hey, Millennium (Nasdaq: MLNM), we have a complaint to file with you. It goes something like this:
Last week, you announced a $2 billion acquisition of Cor Therapeutics (Nasdaq: CORR). In your press release, you prominently highlighted benefits of the merger, including the fact that the new company will have nine drug candidates in clinical trials, "multiple" products on the market (I think multiple must mean three), more than 1,200 research and development workers addressing four therapeutic franchises (cardiovascular, oncology, inflammation and metabolic), $400 million in annual revenue, and, thanks to Cor's $630 million in cash and equivalents, the combined company will have more than $2 billion in cash and equivalents.
You made that last point twice in the press release, actually: More than $600 million in new cash; $2 billion cash balance.
Then, later in the day, you held a press conference that our co-manager here, Tom Jacobs, listened to, and during that conference, again the $2 billion cash balance was touted, again thanks to the $600 million in cash and equivalents being gained.
But nowhere, not in your press release and not during your conference call, did we see or hear any mention of the $600 million in long-term debt that Cor holds. That $600 million debt nearly cancels out the new $630 million in cash that you're so eager to spotlight.
So what gives? Why didn't you mention the debt, too, and be more forthright with investors? We know we're living in a world of spin. The government, public companies and anyone else with a media department always try to look as good as possible via spin. Yet, we hope for more from the companies that we buy.
You, Millennium, didn't need to make such a big deal of the cash that you were acquiring if you weren't going to also mention the accompanying debt. You could have mentioned neither and that would have been fine. But you consciously chose -- or your PR department chose -- to talk up the cash and ignore the debt.
Tsk, tsk. Shame on you. We're disappointed.
What were you thinking?
We think we know how you might have justified what you did. There you are, a young biotech company developing drugs and burning cash. Cash is the lifeblood of such startup companies. With this acquisition, you were adding $630 million in cash. Very nice. Given your small cash burn, that cash alone could carry you for a long time, ideally well through your costly development years.
Oh, but you were also adding $600 million in long-term debt. Well, heck -- you rationalize -- that debt doesn't come due for a long time and it's low interest debt. By the time it's paid, the business should be well past development stage and making plenty of money.
So, let's repeatedly point out the cash, which is important to us right now, and just ignore the debt, which is a long-term thing anyway. Cool? Great. Let's spin it that way. Go team!
And off you went. Except in our eyes, you lost a little integrity.
You're not the first
Other companies that we own have fallen short of our expectations in the past. In April, Brian Lund called eBay (Nasdaq: EBAY) to the ring when the company's balance sheet and tax benefits from stock options obfuscated cash flow numbers. The following days, Brian talked with eBay further. In the company's next quarterly report, eBay got huge props for clarifying all the numbers in question to a degree that we've never seen from a public company before. Brian's confrontation with eBay led to convincing evidence that eBay indeed wants to be upfront with investors.
What we ask of Millennium
Millennium, we're now asking the same of you. For a start, what we ask is simple compared to what Brian asked (and got) of eBay: When you make acquisitions (as you surely will again), don't hype the cash that you're acquiring if you're not also willing to prominently mention any debt you'll be acquiring. Have more respect for your investors than to try to draw our eyes to the shiny new toys while ignoring the burdensome obligations that come with them.
We have another request of you, and of all companies that make acquisitions with new stock: We believe that it should be mandatory to state the dilution that issuing new stock will cause to your existing shareholders. Shareholders have a right to know the numbers right off the bat. They're the ones being diluted. They shouldn't be forced to do the calculations themselves, risking errors. Millennium, you're issuing enough new stock to buy Cor that it will dilute existing shareholders by approximately 26%. You did mention in your press release how many new shares you'd issue; take it one step further and give readers (your investors!) the actual dilution number.
Another case of spotlighting the positive
Human Genome Sciences (Nasdaq: HGSI) is no stranger to spin, either. The product-less company has a lofty valuation to maintain, so when it reported phase IIa trial results for its leading product candidate, Repifermin, it highlighted that the drug was safely tolerated by patients. Investors were much more concerned with the downplayed fact that the wound-healing drug wasn't determined effective in these particular treatments. That news sent the stock reeling.
We've always assumed that at least half of HGS's drug candidates would end up failing. Those are the odds -- at best. There is still reason to hope for Repifermin, however, because doses can be increased in future studies and effectiveness may coincide with higher doses. Given the strict limitations of the discouraging trial, we shouldn't blame HGS too much for spinning the news as it did, but simpler forthrightness and explanation would have been welcomed by us, and -- judging by the share price and the discussion board -- by everyone.
Remember Sit 'N Spin? Of the companies mentioned, Jeff Fischer has beneficial interest in eBay and Millennium, as can be seen on his online profile. The Motley Fool has a full disclosure policy.