Great mention on The Motley Fools.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
ChiRex Welcomes Glaxo's Guarantee
Investors struck with an unsettling sense of deja vu after CHIREX (Nasdaq:CHRX)
announced it was buying a production facility from London-based
GLAXO-WELLCOME (NYSE:GLX) should not worry that they are losing their minds.
Chirex shares rose $2 7/8 to $14 1/2 after the company signed a letter of intent to
acquire Glaxo-Wellcome's cGMP pharmaceutical production facility at Annan,
Scotland, complete with a guarantee of at least $250 million in business for ChiRex
over the next five years. The news recalls the February 5th deal between
CATALYTICA (Nasdaq:CTAL) and Glaxo-Wellcome that allowed Catalytica to
purchase a separate factory with a similar supply guarantee.
On February 5th, Glaxo-Wellcome agreed to sell a Greenville, North Carolina
production facility to Catalytica. The agreement gave Catalytica the 1.8 million
square-foot production facility, 600 acres of land and a manufacturing supply contract
worth up to $800 million in revenues over five years for an undisclosed amount. As
Catalytica only did $16 million in revenues in fiscal 1996, the prospect of up to $800
million in business with companies like Glaxo-Wellcome, Pfizer, Merck, Pharmacia &
Upjohn, and Novartis was quite enticing.
At first glance, the ChiRex deal appears to be extraordinarily similar to the Catalytica
arrangement, which was completed on June 30th. ChiRex is a contract manufacturer of
components for major pharmaceutical companies, and already does business with Elf
Aquitaine's Sanofi division, Pharmacia & Upjohn, and Pfizer. The company is
restricted from releasing most customer information due to extensive secrecy
agreements that govern many of its transactions. In 1996 the company received almost
50% of its revenues from the eight products it makes for Elf Aquitaine's Sanofi unit.
The company's expertise in bulk additives, chemical intermediates, and development
products in conjunction with its established relationships make it a logical choice for
Glaxo-Wellcome to partner with in Glaxo's quest to get all intermediate production
done by outside parties.
The benefits of today's deal for ChiRex are easy to see. First, the company gets all of
the buildings, land and equipment at the 154-acre Annan, Scotland property, including
three main production buildings, for 40 million pounds (approximately $66 million), plus
certain working capital. The company will invest an additional 30 million pounds ($48
million) to accommodate Glaxo's newly contracted products and in return will get at
least $250 million in revenues from Glaxo over the next five years, an amount that could
rise to as much as $450 million. The company did $89.8 million in revenues in fiscal
1996, implying that even the low end of the contract is significant. ChiRex gets
production capacity and a significant, guaranteed stream of revenue in return for
expanding its core business.
Despite the positive news over the last year, trading has been rather choppy for
ChiRex. ChiRex first showed up on the Fool News radar screen in late August of 1996
when a "buy" rating from Legg Mason analyst Eugene Rothman pushed the shares up
almost $2 to $11 in two short days. The company continued to climb after reporting
fourth quarter earnings 18% ahead of consensus estimates in late February, and finally
climbed again to the $11 range after partner SEPRACOR INC. (Nasdaq:SEPR)
assured investors its sale of ChiRex stock would not affect the relationship between
the two companies. With today's news, the stock hit a 52-week high of $14 3/4 before
closing at $14 1/2.
ChiRex may suffer from the perception it is a commodity chemical manufacturer for the
drug industry in spite of the intense secrecy required for each of the deals to be
consummated. Forward earnings estimates have been trending down over the past
three months according to First Call, but still remain at $1.05 per share with an
estimated five-year growth rate of 42%. With the company currently priced at $14 and
change, the potential upside from the Glaxo deal may not be completely priced into the
shares. The company already tripled sales in its March quarter due to existing deals,
becoming cash flow positive and generating $0.11 per share. Even if the new business
is at 2.5% margins instead of the 7.6% ChiRex generated last quarter, and revenues
from the deal only come in at $25 million given the partial year, this will add $0.08 per
share to 1997's $0.57 EPS estimates, or 14%. Investors might want to take a look at
the company. |
