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.
No Position.
I get your point. I guess from the business standpoint it wouldn’t have made sense to spinoff FURX but from a market standpoint it did. Also they spun it off instead of selling it which shows they still believe in the business otherwise they would have sold it.
Thanks for the reply
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Dear Gaurav:
The spinoff of FURX was due to a very sound reason. PPDI
shareholders and Street analysts had been asking for it for years.
Assume you have a buisness which typically trades at an average 20 PE multiple. Your business generates $100 mm earnings each year. It would be valued by the market at $2 billion. Right?
Now lets say you acquire another unit (biotech) which generates $100 mm in losses for two years but has fantastic future prospects. Maybe this business, if successful, will enable you to earn $300 mm each year once it becomes profitable.
However, for the next couple of years, your combined earnings are zero. What do you think would happen to your stock?
Regardless of the prospects of the money losing business, market will punish the combined enterprise.
Its that simple. The numbers I have used are hypothetical and dont relate to PPDI or FURX but hopefully I have made my point.
Best
FF
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I looked at the FURX situation when it was spun off. With most of the cash being depleted during a year and half the upside in the stock is purely dependent on milestone royalty payments and success in the clinical trials.
Without having any technical background to guess about the prospectus I am suspecting why would PPDI spin it off if the pipeline and revenue stream was so valuable ? I know that the R&D expense was a drag on their revenue stream but if the potential for return was 300% I bet PPDI wouldn’t have spun it off.
Am I missing something ? What do you think ?
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