Friday 16 March 2007

PBP - where's the beef?

Probiotec today announced it had acquired 3 pharmaceutical products including all associated intellectual property from Johnson and Johnson. The acquisition price was $4.25m plus stock at cost to be funded by PBP's existing debt facility. The company claims the acquisition will be eps neutral for FY07 and eps positive for FY08. Other than that there is very little to go on. No information on the revenue that these pharmaceuticals currently bring in, their current share of the market and whether that has been declining or increasing. Thus it is impossible given the information regarding the transaction to assess the value of the acquisition.

What is certain is that PBP's gearing level has risen to around 70%. My preferred measure of a company's performance is Return on Equity however it is more instructive to look at Return on funds employed (ROFE) for businesses that carry high debt levels. The extra debt brings PBP's ROFE down to an uninspiring 9.0%

As an investor you would like to think that management would only purchase market leading products with firmly established market share or up and coming products that are gaining market share. However if that is the case it begs the question as to why Johnson & Johnson is offloading them. Lack of information means you have to take management at their word. PBP haven't disclosed any more or less than most companies do regarding acquisitions however the lack of information doesn't inspire much confidence. PBP shares closed up 5.9% at $1.07.

2 Comments:

Anonymous said...

Scott,

If we ask what JNJ get's from the deal it places it in a slightly different frame.

JNJ get's $450 million.
JNJ get's to sell a product line[s] that has come under increasing competition from *generic* firms who are cutting into the margins to such a degree that they become non-profitable.

Where is patent expiry?
Probably little chance of an extension.

Does JNJ have new *improved* product lines in pipeline that improve upon the sold product lines?

Pharmaceuticals, one of the dirtiest businesses in town. I've done medical research in the past, no names, but as corrupt as it comes. [not JNJ]

jog on
grant

The Fundamental Analyst said...

Yep all valid questions and none of which are answered by the announcement and going on past experience management will refuse to answer.