PBP's little legal problem

Well I can't say I wasn't warned. On March 15th PBP announced they had acquired some branded pharmaceutical products from Johnson & Johnson. In that same announcement they also mentioned that in their short term provisions account was an amount of $100,000 in relation to an intellectual property claim against PBP and others going back a number of years. PBP stated that:

"claims made by the plaintiff against the other defendents which, if substantiated, could result in the plaintiff's claims against Probiotec being materially higher than the amount Probitech has provisioned for."

Today PBP's little legal tangle has gotten bigger announcing that:

"all of the 8 respondents to the Phoscal Claim, including three companies in the Probiotech Group, have been ordered jointly and severally, to pay the claimant's costs."

As an added bonus the other respondents don't have the funds so PBP may have to cover all the costs. If that wasn't enough a seperate decision on damages is yet to heard.

Interestingly the prospectus mentioned nothing about the legal case. Last month the possibilty of a liability was mentioned and now today the possibility has become reality with PBP likely to be forking out for other parties and with damages claims yet to come. Clearly the revelations are getting worse and sentiment justifiably so has turned very negative, the stock closing down 13.4% at $0.90. PBP claims that the bulk of their liability will be attributable to the costs orders and not damages however that is hardly reassuring given the events so far.

Management assurred me today that the recently announced acquisition will be unaffected and that prospectus forecasts will be met. That is before taking into account abnormals of course. The claim against PBP will of course be classified as an abnormal and as such it doesn't affect my valuation of the stock signifcantly. I have raised the discount rate to 16% to reflect the increased risk of the stock bringing my valuation down to $1.00. However that doesn't mean I'll be rushing out to buy more. The legal proceeding is expected to drag on for months as the extent of PBP's liability is determined.

Small questions I had over the capability and integrity of management have turned into big ones. The kind that would have been useful before entering the stock. Needless to say I didn't do my due diligence as well as I could have. However I find it hard to sell at current prices since it is already trading below fair value and the business itself is performing well.

During the next week confirmation by the ACCC on the acquisition will take a back seat as the focus will be on how PBP proceed with the Phoscal claim. The ride so far has been an interesting one for all the wrong reasons and I expect it to get bumpier in the short term.