Dow Jones article discussed pending spinoff of research sub.
Dow Jones News Service via Dow Jones
By Tom Locke
BOULDER, Colo. (Dow Jones)--NeXstar Pharmaceuticals Inc. (NXTR) is on the verge of announcing a final decision on spinning off a chunk of its research and development operations as a separate, publicly traded company.
Although the board hasn't made an official decision, an announcement is expected in early October.
"I think the decision to go forward with this will be an early fourth-quarter event," said Mike Hart, NeXstar's chief financial officer and chairman of its management committee, told Dow Jones. "The actual split will occur in the first quarter (of 1999)."
NeXstar hopes separating its operations will better satisfy long-term and short-term investors. Long-term investors are expected to find the company's research and development operations more attractive, while those looking for short-term gains can invest in the company's drugs that are already on the market.
The split would likely be accomplished by issuing shares in the independently operated R&D company to existing NeXstar shareholders.
The Boulder, Colo., pharmaceutical company announced Aug. 19 that its board was actively evaluating the spinoff of its drug-discovery operations and that the company's chief executive officer, Patrick Mahaffy, had resigned.
"His vision was to build an integrated pharmaceutical company," Hart said. "The board determined that was not how they wanted to proceed. He saw fit to step out of the picture."
Mahaffy didn't return phone calls seeking comment.
"I thought he was doing a good job," said Caroline Copithorne, senior biotechnology analyst with Prudential Securities Inc. However, she said, there was pressure for profitability, particularly from 30%-owner Warburg Pincus Capital Partners L.P. "They were certainly growing impatient over waiting for profitability."
NeXstar reported a loss in the second quarter of this year of $3.4 million, or 12 cents a share, on revenue of $29 million, compared with a loss of $8.3 million, or 31 cents a share, on revenue of $23.2 million in the year-ago second quarter.
James Thomas, a managing director at Warburg Pincus, couldn't be reached for comment. But Robert Swift, managing director of research for investment firm Bigelow & Co., agreed that Warburg Pincus was likely interested in the split.
Analysts expect a spinoff to result in a higher valuation for NeXstar's stock. But, so far, investors have reacted cautiously.
NeXstar's Aug. 19 announcement said the parent company could realize yearly savings of $20 million through spinning off its drug-discovery research and development operations, specifically the Selex process that rapidly identifies compounds for potential drugs.
That $20 million would go to the bottom line, Swift, of Bigelow & Co., said. So it would translate to 62.5 cents in yearly earnings per share on 32 million fully diluted shares outstanding. Assuming total projected 1999 earnings of 75 cents per share and a price-to-earnings ratio of 20, the parent company's stock value would be $15, Swift said.
Factor in a $3 per share value for the spinoff company, and the total value is $18 per share, Swift said. That is a considerable premium above NeXstar's closing price of 9 7/8 Wednesday. The shares were recently up 1/8, or 1.3%, at 10.
Even assuming a "close to the bottom" 15 multiple and a $2.50 a share value for the new company, the value still comes out to $13.75, Swift said. "I think that in the short run, it's a good move."
NeXstar's drug-discovery spinoff may make sense on paper, nevertheless, but the company's stock rose only 7.6%, to 9 3/4, on Aug. 19, the day the company said it was evaluating a split. On Sept. 1, it reached a 52-week low of 6, and the price is still about half the 52-week high of 18 7/8 set Sept. 30.
Investors are waiting to see the details of the split before reacting, Swift said.
Plus, it isn't the first time the market has responded to NeXstar news with a yawn. Swift and Prudential analyst Copithorne noted recent positive news had little impact on the stock, fueling the argument for a split.
There was the May 27 announcement of a multipronged deal with Glaxo Wellcome PLC (GLX), including a $10 million equity investment; the July 22 announcement that NeXstar was applying to bring a Selex-discovered drug for blindness into phase-one clinical trials; and the Aug. 16 announcement of a a joint venture to use NeXstar's Pass technology, which commercially produces certain nucleic acid
chains.
In exchange for 51% in that joint venture, called Proligo LLC, SKW Trostberg AG agreed to pay NeXstar $15 million cash, plus up to $23.5 million more.
Copithorne figures NeXstar would have lost 3 cents a share in the third quarter without the Proligo deal. But with it, she estimates NeXstar will earn 51 cents.
After the spinoff next year, NeXstar will depend on profitability to come from its liposomal drugs, led by AmBisome, which treats blood-borne fungal infections. Liposomes are microscopic fat bubbles used to encapsulate drugs to improve their safety and efficacy.
The spinoff company will get the Selex drug-discovery technology and cash from the parent to fund two years of operating expenses, estimated at $30 million by Swift, of Bigelow & Co. Plus it will get NeXstar's chief scientific officer, Larry Gold.
While Prudential's Copithorne sees the benefit of the split, she also has reservations. Each of the two companies will have smaller capitalization than the pre-split company, and each will likely have lower trading volume and liquidity, she said. And analysts may not cover both companies, she added.
Another potential long-term problem for the parent will be creating a deep pipeline of other companies' new drugs for further clinical development or sale by NeXstar, Swift said. It won't be easy to find good opportunities, he added.
Despite the potential drawbacks, NeXstar is pushing forward with the split. Hart, NeXstar's chief financial officer, said the integrated model simply hasn't worked. It takes an average of seven years and $300 million to take a drug to market, he said.
"If you don't have a billion-dollar product, that becomes a big challenge," he said.
Now, NeXstar faces a different sort of challenge, not only in finalizing the details of the split, but in finding two chief executives to run the new companies. Hart said he doubts the search will be completed by the end of this year. |
