Firm Mired In Lawsuits Mounts IPO
By LAURENCE DARMIENTO
Staff Reporter
If American Pharmaceutical Partners Inc. proceeds this week as planned with its $165 million initial public offering, investors will be faced with a seemingly attractive prospect.
The Los Angeles-based manufacturer has more than doubled the sales of the American generic drug business it acquired in 1998 from Fujisawa Pharmaceutical Co. Ltd. of Japan, according to its prospectus.
It also has new generics in the pipeline, and, even more promising, it plans to license from its closely held parent the patent for what it’s calling an improved version of Taxol, the world’s best selling anti-cancer drug.
Big name Wall Street firms CIBC World Markets, Bank of America Securities LLC and UBS Warburg are underwriting the offering, lending it luster.
But that is, at best, only half the story.
What the prospectus fails to make clear is the tortured legal history involving APP, its parent, American BioScience Inc., and the founder and chief executive of both companies, Dr. Patrick Soon-Shiong. The particulars, not all of which are mentioned in the Securities and Exchange Commission filing, include:
> An investigation by the Federal Trade Commission for possibly engaging in anti-competitive practices.
> Both companies being jointly liable for a $24 million payment to an entity controlled Soon-Shiong’s brother, Terrence, stemming from prior litigation.
> American BioScience’s involvement in a series of lawsuits over Taxol with the Food and Drug Administration, as well as with a Florida firm seeking to market the generic version of the drug and a health insurer.
> A federal judge’s ruling that Soon-Shiong improperly applied for and received a patent for an experimental form of Taxol actually developed by scientists at Florida State University. The judge ordered the names of Soon-Shiong and two colleagues stripped from the patent.
The underwriters and securities attorneys involved in the offering declined all comment, noting the company is in a quiet period.
Beyond the specifics of Soon-Shiong’s checkered dealings is the question of whether this soon-to-be-public company is releasing as much information as it should.
Attorney Joseph Coyne Jr., who has represented Soon-Shiong and his companies, said the filings follow SEC regulations that is, disclosing any lawsuits that could materially affect APP, not those that only name the parent.
He declined to make Soon-Shiong directly available for comment.
Trusting filings
“The underwriter wants to sell the stock, and the company wants the proceeds,” said Irving Einhorn, the former director of the SEC’s Pacific region and now a private attorney.
“There is this constant strain over how much disclosure there should be. The bottom line is that if there is potential financial liability it must be disclosed.”
This is not the first time that Soon-Shiong has found himself in the spotlight. A former assistant professor of medicine at UCLA, Soon-Shiong made headlines in 1993 as a researcher at St. Vincent Medical Center in Los Angeles.
He implanted insulin-producing islet cells in a long-time diabetic using a technology that encapsulated them in a seaweed gel. The gel was intended to protect them from the body’s immune response, a perennial challenge in the effort to produce a so-called artificial pancreas.
Soon-Shiong reported great success, setting off a flurry of press reports, although the implants later failed and claims about their success were denounced as “hype” by the American Diabetes Association the following year.
Still, the promise of the technology led Mylan Laboratories Inc., a Pittsburgh-based generic and brand drug company, to invest in VivoRx Inc. and VivoRx Diabetes Inc., the two L.A.-based companies Soon-Shiong formed with Terrence to capitalize on the artificial pancreas technology and other research. Mylan also was given a license to market and sell the diabetic treatment, then in trials with patients.
The agreement fell apart when Mylan began to suspect in 1998 that Soon-Shiong was diverting research funds toward two companies he had formed independently of his brother to pursue unrelated research, according to court documents.
Those companies were VivoRx Pharmaceutical Inc., ABI’s direct predecessor, and APP. The research included what has become the new version of Taxol that APP is touting in its IPO prospectus.
Mylan sued each brother separately, while VivoRx and Terrence sued Soon-Shiong, American BioScience and APP claiming his brother allowed the diabetes research to lie fallow as he pursued his own work.
The lawsuit labeled it “betrayal, arrogance, greed and personal aggrandizement that resulted in corporate misconduct of enormous proportions.”
In the end, Mylan settled its suit with Soon-Shiong and his two companies. The settlement included a $9.2 million payment to Mylan exchange for the company giving up an equity interest it had taken in American BioScience, according to documents Mylan filed with the SEC.
Soon-Shiong settled his legal dispute with VivoRx and his brother this past February.
According to court documents, Soon-Shiong defended his actions by saying all parties knew he was pursuing his own research and co-mingling some of the research funds pending a reimbursement arrangement.
‘Unusual’ involvement
Coyne said it is not uncommon for entrepreneurs and their investors to have legal disputes, though he acknowledged the brother’s involvement was “unusual.”
He added that an arbitrator absolved his client of any wrongdoing and the payments were simply a way for two brothers to part their business interests. However, Coyne refused to provide the arbitrator’s report. Charles Kreindler, Terrence’s attorney, also refused to make the document available or comment for this story. Terrence, who lives in London, could not be reached.
“I recognize the allegations are fraud this, fraud that,” Coyne said. “But Patrick is the typical brilliant doctor who did not know much about business.”
And despite the litigation, American BioScience and APP took off.
In 1998, APP bought the generic drug product line of Fujisawa USA Inc., the U.S. subsidiary of Fujisawa Pharmaceutical Co. Ltd. a Japanese drug company. (Terrence’s lawsuit claimed the diversion of research funds made the leveraged buyout possible.)
At the time the terms of the deal were undisclosed, but according to APP’s SEC filing related to the IPO, the company acquired Fujisawa’s U.S. business for $75 million. What APP got from the deal was a catalogue of drugs, as well as manufacturing plants in New York and Illinois and a research facility.
FDA approvals
In the process, it more than doubled sales. APP attributes the success to increasing market penetration. It also notes receiving 26 new generic product approvals from the FDA. The company says it produces over 100 generic injectable drugs, with a primary focus on cancer, infection and critical care.
Funds from the IPO are intended to grow the generic side of the business, pay off $35 million in debt and pay for a license of $45 million to $60 million to American BioScience for the new version of Taxol.
Soon-Shiong holds 80 percent of the capital stock of American BioScience, which after the IPO will hold 67 percent of the common stock of APP, leaving him firmly in control of both companies.
American BioScience’s version of Taxol, paclitaxel, is now entering the last phase of clinical trials. However, technology underlying the new drug is part of a wide-ranging paclitaxel patent American BioScience received in 1999 that has drawn the company into a dispute over potential collusion by major drug companies to keep generics off the market.
American BioScience filed lawsuits in federal court last year against both the FDA and Bristol-Myers Squibb Co., the original patent holder on Taxol, in an effort to get the patent registered with the FDA.
Under the complexities of federal drug law, the registration interfered with the expected sale of a generic version of Taxol by a Miami firm called Ivax Corp. American BioScience and Ivax are suing each other in Los Angeles federal court over the patent.
Coyne said that by taking court action, American BioScience was trying to protect potential future rights to sell its own generic form of Taxol, especially if its improved version should ultimately not be brought to market.
But Ivax has accused American BioScience of conspiring with Bristol-Myers, since any delay meant that the giant pharmaceutical company could continue selling its higher priced branded drug without generic competition.
Last month, Cobalt Corp., a Milwaukee health insurer, filed its own lawsuit against Bristol-Myers and American BioScience, also accusing the two of conspiring, thereby costing it and other insurers money by forcing it to pay the full price for the branded Taxol. The lawsuits are in various stages.
Coyne dismissed the Taxol litigation as another example of the kind of patent litigation that is rampant in the industry. “It’s the nature of the beast,” he said.
He stressed that despite all the litigation, none of it is stopping APP in its efforts to bring its new version of Taxol to market a key impetus of the IPO. Nor should it obscure the fact that Soon-Shiong has built a growing company that should be attractive to investors.
“I know there is a lot of smoke out there, but there is also a very positive story for L.A. business,” Coyne maintained.
