Investors will have a little less value to divvy up when Abraxis BioScience (NASDAQ:ABBI) splits in two on Tuesday -- its stock price dropped 10% on weak earnings growth last week. My guess is that the lost value is coming out of the APP Pharmaceuticals' share of the business.
Revenue increased 19% over the year-ago quarter, but it was a tale of two different companies combining to produce that number. Revenue from hospital-based products -- which will become APP Pharmaceuticals on Tuesday -- was up just 2.3% year over year. Contrast that with the 65% year-over-year increase in revenues generated by its nanoparticle drug ABRAXANE, and you can see which of the new companies has Motley Fool Rule Breakers growth potential.
I'm probably being a little hard on the new APP Pharmaceuticals. While it had a rough quarter, revenues for the year are expected to come in a respectable 9% over 2006 revenues. The company has already received 14 FDA approvals this year, including last month's tentative approval for Pfizer's (NYSE:PFE) Camptosar, which it's set to launch when the patent expires in February. Add to that 29 abbreviated New Drug Applications pending with the FDA, including tentative approvals, and the future looks pretty bright for the company that's soon to be tickered APPX on the Nasdaq.
But the real growth story is in the research and oncology portion, which will retain the ABBI ticker. Sales of the only product, breast cancer treatment ABRAXANE, have been on fire, taking market share from Bristol-Myers Squibb's (NYSE:BMY) Taxol and Sanofi-Aventis' (NYSE:SNY) Taxotere as doctors begin to use it in combination with Genentech's (NYSE:DNA) Herceptin and Avastin. With Sonus Pharmaceuticals' phase 3 trial flop, further competition in the taxane market is pretty far off.
Further growth for ABRAXANE should come from Europe, where it is likely to receive approval shortly. Abraxis has decided to go it alone and market the drug in Europe by itself. Normally, I wouldn't say it would be worth to spend the $30 million-$40 million the company plans to spend next year setting up in Europe, but with three other chemotherapy compounds in its pipeline, it should be able to use the sales force more efficiently down the line.
Sum of its parts
How will investors split up the $3.5 billion market cap that Abraxis currently fetches? Given that it has only one product and a known amount of starting cash, it's probably easiest to value Abraxis than the APP Pharmaceuticals spinoff.
There are multiple ways to value a company, but perhaps the easiest is to see how investors are valuing similar companies. With clinical trial costs sucking up much of the revenues from companies with one or two marketed drugs, valuations based on earnings aren't the best. A rough -- but fairly decent -- valuation is to compare market cap to sales.
One-drug wonder Onyx Pharmaceuticals (NASDAQ:ONXX) sales are on pace for around $350 million this year, and with a market capitalization of $3.1 billion, the shares are trading at about nine times sales. Amylin Pharmaceuticals (NASDAQ:AMLN) has twice as many drugs, but is still a decent comparison. It's on pace to rack up $685 million from its drugs this year, and with a $5.4 billion market capitalization, it's trading about 8 times 2007 sales.
Whether Abraxis can fetch a market cap of eight or nine times sales will depend on whether investors think that ABRAXANE has as much growth potential. In the most recent quarter ABRAXANE managed a 79% year-over-year increase in sales compared to a 28% year-over-year increase for Amylin's sales and a 130% increase for Onyx's Nexavar -- looks like it's a reasonable assumption at the very least.
Using this rough ballpark and the $285 million to $305 million of expected sales of ABRAXANE in 2007, we get a market value of between $2.3 billion and $2.7 billion.
APP Pharmaceuticals does have sales nearly double ABRAXANE, but the gross margins on generic products are significantly lower than that of its branded counterpart. Add to that the $1.15 billion loan it's taking out to fund the split and a less robust growth potential, and it looks like APP Pharmaceuticals deserves a considerably smaller piece of the pie -- probably somewhere between $0.8 billion and $1.2 billion.
The big unknown in the splitting of the value is Abraxis' platform technology. Like other platform drugmakers, it's only been proven to work with one drug. With the pipeline still in early stage trials, it looks like investors are assigning it essentially no value. If one or two of those drugs pan out, Abraxis could see double-digit growth for many years to come now that it's shed its generic-drug business.
