Is Abraxis BioScience Inc. turning out to be an investors' bust?

The day before the November announcement of the merger that created the Los Angeles biopharmaceutical company, the stock of its predecessor public company was trading at $47.61.

Today, investors who held on to those shares have seen a 50 percent fall in the paper value of their holdings. And it doesn't look like there will by a return to a stock price that high anytime soon.

Abraxis, formed from the $4.1 billion merger of privately held American BioScience Inc. and the public American Pharmaceutical Partners, has a growing, bread-and-butter line of high-margin injectable generics but its proprietary cancer drug Abraxane is the product that Wall Street values so highly.

The drug attaches the cancer treatment to a nano-sized protein particle, fooling cancers cells into bonding with it. The company has a pipeline of experimental drugs using the same cutting-edge delivery system.

However, Abraxane is performing below expectations and the latest efforts to boost sales are in the early stages. Sales in the quarter were $36.3 million, between $4 million and $10 million lower than analysts' projections.

That, along with a heavy dose of merger-related costs, contributed to a net loss of $90.8 million in the quarter, even though generic sales came in at $120.6 million 5 to 10 percent better than analysts anticipated. The stock closed at $23.28 on Aug. 9.

"Getting the stock price up will be a function of Abraxane sales validating the valuation that was commanded last year," said Megan Murphy, an analyst with Lazard Capital Markets, who has a $43 price target for shares. "So those Abraxane sales have to take off."

Heightened expectations for Abraxane stem from the product's introduction last year. Murphy notes that the company shipped more than $40 million worth of product when Abraxane launched in first quarter of 2005. Later in the year, on rumors that the company was planning a
price increase, distributors stocked up at the cheaper rate prior to the late December announcement.

This left those following the company with little clear data on what should be the drug's normal sales rate. Investors got a better idea during an Aug. 4 conference call, when management lowered its guidance for Abraxane sales in 2006 to a range between $170 million to $190 million, down from an earlier estimate of more than $200 million.

"There was an expectation that it would have done a lot better by now," said Murphy, noting that the drug has a better safety and effectiveness profile than competing drugs. "Even so, this was a drug that was developed on a shoestring, and launched with half the sales force it has now."

Indeed, the company has moved to provide Abraxane with the support Murphy and the other analysts believe it deserves. Drug sales, especially in the cancer market, are driven by positive clinical study results, and the company now has more than 30 such studies in the works in breast, lung and other cancers that could widen Abraxane's potential patient base.

(Abraxis also spent the second quarter consolidating its operations in the Westside. The company bought a 3.5-acre property in Culver City for a new research and development facility and acquired a 50,750-square-foot laboratory facility in Marina del Rey. It still retains American Pharmaceutical's manufacturing facility in Illinois and also has plants in Puerto Rico and Switzerland.)

In addition, Abraxis has brought in bigger guns to help with marketing. This month it launched a five-year co-promotion deal for Abraxane with London-based drug giant AstraZeneca plc, maker of heartburn drug Nexium and cholesterol fighter Crestor. Under the deal, AstraZeneca will earn a commission on U.S. Abraxane sales.

As part of the arrangement, Abraxis bought U.S. rights to AstraZeneca's portfolio of injectable anesthetic and analgesic drugs for $334 million, which will add to revenue this quarter. Of Murphy's $43 price target, $7 is her estimated value of the new product lines.

Murphy's target share price is the most optimistic of the three analysts who cover the company. CIBC World Market's Elliot Wilber has a $31 goal and Merrill Lynch's Gregg Gilbert has set a $37 objective.

At the base of Wall Street's caution about Abraxis is the reality that insider shareholders, largely Chief Executive Patrick Soon-Shiong, ended up with the vast majority of shares in the merger due to his large stakes in both companies and not without some reason. Prior to the merger, Soon-Shiong's privately held American BioScience served as the de-facto research arm of American Pharmaceutical, and Abraxane's Trojan-horse style delivery system was developed by Soon-Shiong in the early 1990s.

Today, Soon-Shiong, a former UCLA assistant professor of medicine and St. Vincent Hospital surgeon, controls 85 percent of common shares in the company, which has a $3.8 billion market cap. Institutions own the bulk of the remaining public float.

Still, in the merger, outside shareholders were being asked to accept a lesser economic stake in American Pharmaceutical's more reliable generic business in exchange for a riskier new stake in American BioScience's biotech portfolio, which isn't expected to start coming to market before 2008 at the earliest.

Abraxis opened for trading at $29.41 on April 19. The lowered price, which had been moving downward since the November merger announcement, partially reflected the fact that investors had seen their shares devalued in the merger itself, which involved the issue of 86 million new shares. However, investors were counting on accelerated Abraxane sales to drive back up the stock price hence, investors' disappointment.

In addition to Soon-Shiong's ownership stake, which helps make him one of Los Angeles' wealthiest individuals, the company's board this month announced it had approved a 38 percent increase in his base salary to $830,000. In 2005, his annual compensation, including a $225,000 bonus, totaled $825,000.

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