Farukh Farooqi has a typically excellent post at Oozing Alpha on Furiex Pharmaceuticals Inc. (NASDAQ:FURX):
FURX, spun off from PPDI on 6/14/10, is a $10 stock with net cash (cash minus all liabilities) of $10 per share. It earns royalties on two drugs already in the market with potential milestone payments of $14.40 per share. It has three other programs in its R&D pipeline. According to some Street estimates, the value of Furiex’s royalties & pipeline is $30-$36 per share.
The entire float has traded since the spin-off, and selling pressure may soon begin to recede. As part of the spin-off, 18% of the equity is set aside for management. In addition, the Chairman owns 6% of the outstanding shares.
Spin-Off Background: On June 14, 2010, Pharmaceutical Products Development Inc. (PPDI), a Contract Research Organization, spun off its drug discovery business to shareholders in a tax free transaction.
The main motivation behind the spin-off was to separate a cash flow generating, service business (PPDI) from a cash utilizing, biotech division (FURX). PPDI has 118 mm shares and for every 12 shares of PPDI, shareholders got one share of FURX.
FURX has a market cap of $100 mm, tiny when compared to PPDI’s $2.9 billion equity cap.
Hence, the spun-off stock is not likely to have much appeal for PPDI shareholders who are mainly interested in the CRO business or those can’t own a small-cap stock.
Sure enough, FURX began trading in the high teens on June 1 and has dropped to $10 on no new news.
Value Proposition: I was browsing through some old analysts’ reports written when PPDI announced the spinoff to see what they thought of the development business (now Furiex).
In a report dated 10/29/2009, Barclays had assigned a value of $1 per PPDI share to Priligy and $1 per PPDI share to Alogliptin + Dermatology portfolio. This translates $236 mm since PPDI has 118 mm shares out. Add to this, net cash of $94 mm injected into the spin off and it adds up to $33 per FURX share.
Thomas Weisel, in a report dated 10/27/2009, valued Spinco at $2.50-$3.00 per PPDI share or $30-$36 per FURX share.