This excerpt taken from the ABII 8-K filed Nov 8, 2007.
Reasons for the Separation and Distribution
Old Abraxis board of directors has approved the separation of the hospital-based products business and the proprietary products business into two independent, publicly-traded companies. Old Abraxis board of directors believes that the separation of our proprietary products business from the hospital-based products business will enable each company to enhance its strategic, financial and operational flexibility and unlock its long-term value. In reaching its decision to approve the separation, Old Abraxis board of directors consulted with management, as well as its financial and legal advisors, and considered a variety of factors weighing positively in favor of the transactions, including the following:
Debt Financing. The proprietary products business must raise substantial capital in the near future to enable it to pursue strategic initiatives, including initiation of sales operations for Abraxane® around the world, expansion of uses for Abraxane®, development of its product pipeline and pursuit of other proprietary product
opportunities. Old Abraxis was advised by Wachovia Capital Markets, LLC, or Wachovia Securities, and Merrill Lynch & Co., or Merrill Lynch, its financial advisors in connection with the transactions, that the hospital-based products business likely would be able to raise higher levels of debt on better terms in connection with a separation of its two businesses than would be available to Old Abraxis on a stand-alone basis. Old Abraxis understood that this would be due, in part, to: the strength and stability of the hospital-based products business free cash flow characteristics relative to those of the proprietary products business; the hospital-based products business broad product portfolio, diversified revenue and profitability, and low capital expenditure needs; the proprietary products business high capital expenditure needs; the high concentration of the proprietary products business revenue and gross profit in a single product; and the additional business risks of the proprietary products business. Old Abraxis was also advised by these financial advisors that if it did not separate into two businesses but engaged in a debt financing to raise the requisite capital, Old Abraxis could have faced greater financial covenants and restrictions on the use of proceeds, including for acquisitions, investments and capital expenditures, as well as restrictions on the utilization of ongoing cash flow. Accordingly, the hospital-based products business will engage in the debt financing and then transfer approximately $715 million of the proceeds to us prior to the distribution, with the hospital-based products business solely responsible for servicing the debt following the transactions. We expect the hospital-based products business to complete the debt financing immediately prior to the separation and related transactions.
Old Abraxis has received a commitment letter from Deutsche Bank AG New York Branch, or DBNY, Deutsche Bank Securities Inc., or Deutsche Bank Securities, Wachovia Bank, National Association, or WBNA, and Wachovia Securities. Under the commitment letter, (i) Deutsche Bank Securities and Wachovia Securities have agreed to serve as lead arrangers of the debt financing and (ii) each of DBNY and WBNA has agreed, severally, to provide 50% of the entire aggregate principal amount of the proposed debt. Wachovia Securities will receive customary compensation (identical to Deutsche Bank Securities) for its services as a lead arranger of the debt financing. WBNA will also receive fees and other compensation (identical to the other lenders) in its capacity as a lender based upon, and to the extent of, the amount of financing provided by it. Each of Wachovia Securities and Merrill Lynch will receive an investment banking fee for its financial advisory services in connection with the transactions, excluding the debt financing.
Sale of Equity Interest. Raising investment capital through an equity investment remains an important business opportunity for both New APP and New Abraxis. Both the hospital-based products business and the proprietary products business would derive immediate and substantial benefits from a transaction in which an investor purchased an equity interest in the business. Based upon discussions and negotiations with various potential investors, Abraxis BioScience has concluded that there is a greater likelihood of selling an equity interest in one or both of the two businesses, and that any such sale would be on far more favorable terms, if it separates the two businesses.
Investor Assessment. Abraxis BioSciences two businesses attract different investors. Abraxis BioScience has been advised by its financial advisors that most analysts focus on Abraxane® while paying limited attention to the hospital-based products business, despite the fact that the hospital-based products business generated the majority of Abraxis BioSciences 2006 revenue and EBITDA. Following the separation and distribution, it is anticipated that analysts who concentrate on companies that sell generic pharmaceutical products will begin to follow New APP, resulting in enhanced and targeted analyst coverage and enabling the stock of the company owning each of the businesses to be marketed to a natural stockholder base, which should improve the efficiency of the markets valuation of each of the companies.
In addition, the financial benefits and investment returns for a proprietary products business may not be realized, if at all, for many years because the process of bringing a proprietary pharmaceutical product to market involves an extended timeline of many years. As a result, the strategic decisions of a proprietary pharmaceutical company such as ours typically are made with a long-term view, and a proprietary pharmaceutical products company often invests significant funds before any revenues for a particular product are realized. By contrast, the hospital-based products business has been characterized by consistent, predictable growth in revenues and
earnings. In addition, the investments made for our proprietary products business, including Abraxane® , have negatively impacted Abraxis BioSciences earnings. Ultimately, the separation and distribution will allow investors to understand better the differing business models and financial performance of New APP and New Abraxis.
Facilitate Our Growth. As part of our overall business strategy, we may pursue potential merger and acquisition, joint venture, alliance and growth opportunities. Abraxis BioScience believes separation of its two businesses will enable each management team to identify, evaluate and structure acquisition and investment opportunities based on the needs of the particular business, not the combined entity. For example, as a separate entity, we may pursue an acquisition of a company that is not currently profitable, but which has proprietary technology or products that we view as beneficial to our business and warrants the investment despite the targets operating results. Under the current company structure, such a transaction might not be pursued. In addition, the Abraxis BioScience board believes its common stock is undervalued. Any increase in aggregate stock value should permit each of the businesses to use its own equity as acquisition and investment currency as appropriate strategic opportunities are identified in the future but in a manner that preserves capital with significantly less dilution of the existing stockholders interests.
Targeted Incentives for Employees. As a pharmaceutical company that markets, sells and distributes both hospital-based generic injectable products and proprietary pharmaceutical products, Abraxis BioScience has found it difficult to recruit accomplished personnel, and issues regarding how to compensate employees that sell one of these two different types of products have arisen. For example, given the different distribution channels, proprietary sales personnel generally are more specialized than generic sales personnel and therefore typically request higher levels of compensation (and typically request different mixes of compensation elements). Accordingly, Abraxis BioScience has experienced some difficulty in reconciling these differing needs while trying to maintain standardization in compensation. Similar problems may arise in recruiting management, including senior management, which typically will have experience with either generic pharmaceutical products or proprietary pharmaceutical products, but not both. We believe the separation and distribution will facilitate resolution of compensation issues that have arisen and may arise as a result of Abraxis BioSciences operation of two businesses within a single company.
The separation and distribution also will permit each company to design incentive compensation programs that relate more directly to its own business characteristics and performance and will provide each company with a publicly-traded equity security in a single line of business for use in its compensation programs. For example, an equity incentive award currently represents an interest in both the hospital-based products business and the proprietary products business. However, the employee who receives the equity incentive award typically works for the hospital-based products business or the proprietary products business, but not both. Following the separation and related transactions, we believe that equity incentives will help us continue to attract and retain qualified management and to better motivate employees throughout our organization because they will receive equity awards tied solely to the business for which they perform services.
Old Abraxis board of directors also considered potential risks and negative consequences of the separation and related transactions, including the following:
Leverage and Risks of Insolvency of New APP. Old Abraxis board of directors considered that following the separation and related transactions, New APP will have a significant amount of indebtedness, which will limit its financial and operational flexibility. Old Abraxis board of directors also considered that if New APP were to become insolvent at some point following completion of the proposed transactions, the proposed distribution could be challenged by creditors of New APP as a fraudulent conveyance and stockholders who received shares of our common stock in the distribution could be required to return all or a portion of them to New APP.
Operational Independence. Old Abraxis board of directors considered our financial viability as an independent company following the separation and related transactions. In particular, Old Abraxis board of
directors considered that we have been operating at a loss with significant anticipated research and development costs to support product development efforts and our dependence on a single approved product.
Manufacturing Relationship. Old Abraxis board of directors considered that following the separation and related transactions, we will be dependent upon New APP, LLC to manufacture Abraxane® for a term of four or five years.
Debt Financing. Old Abraxis board of directors considered that New APP or one or more of its subsidiaries is expected to obtain approximately $1.0 billion of debt financing and, in addition, enter into a $150 million revolving credit facility in connection with the transactions. Old Abraxis board of directors also considered that New APP LLC and New APP will be solely responsible for servicing this debt following the transactions.
Restraints on Future Transactions. Old Abraxis board of directors considered that the distribution would result in significant federal income tax liabilities to New APP if there is an acquisition of stock of our company or New APP as part of a plan or series of related transactions that includes the distribution and that results in an acquisition of 50% or more of the outstanding common stock of our company or New APP.
Diversion of Management. Old Abraxis board of directors considered the diversion of management resulting from the substantial time and effort necessary to complete the transactions.
The foregoing discusses the material factors considered by Old Abraxis board of directors and is not exhaustive of all factors considered by Old Abraxis board of directors. In view of the variety of factors considered in connection with its evaluation of the separation and related transactions, Old Abraxis board of directors considered the factors as a whole and did not find it practicable to, and did not, quantify or otherwise assign relative weight to the specific factors considered in reaching its determination to approve the separation and related transactions. In addition, each member of Old Abraxis board of directors may have given differing weights to different factors.