Breaking Up Is Easy to Do

What do a drug maker that sells injectable drugs to hospitals, and a biotech with one approved drug and a platform that might develop many more, have in common? According to Abraxis BioScience (Nasdaq: ABBI), not enough. It's decided to split itself in two.

The hospital-based product business will get a new name, Abraxis Pharmaceutical Products (APP), while the proprietary product business will retain the Abraxis BioScience name. Investors in Abraxis stock will receive one share of each company for each share of Abraxis they currently own.

Abraxis Pharmaceutical Products
Abraxis' hospital-based products have seen substantial growth in the last few years. With the addition of AstraZeneca 's (NYSE: AZN) anesthesia/analgesic portfolio last year, the company currently has more than 400 dosage forms.

In the last five years, APP has received FDA approval to market 55 generic drug forms. It has 29 abbreviated New Drug Applications (aNDAs) pending with the FDA, representing $1.6 billion in annual branded sales, and over 30 more in earlier stages of development. With expected growth in the mid-teen percentages, building on last year's $583 million in revenue, APP is becoming a market leader.

The biggest advantage I can see for APP in breaking free from its former biotech side: Clinical trials are expensive, compared to getting approval of aNDAs. As a separate company, APP can use the cash it generates to invest in new generics, or even buy the rights to branded pharmaceuticals. In the world of generics, margins are the key for success, and being a larger company will only keep gross margins down.

Sales of ABRAXANE have been on fire since hitting the market in 2005. According to May 2007 IntrinsiQ data, it has surpassed Bristol-Myers Squibb 's (NYSE: BMY) Taxol and Sanofi-Aventis ' (NYSE: SNY) Taxotere to become the market leader in metastatic breast cancer. Abraxis expects 2007 sales of ABRAXANE to generate between $285 million and $305 million.

Sales will certainly increase as Abraxis gains marketing approval of ABRAXANE in Australia, Russia, the European Union, China, and Japan, all of which are currently reviewing the drug. Additionally, Abraxis is trying to increase the labeling indications for which ABRAXANE is currently approved. It plans to start phase 3 clinical trials for treatment of breast cancer, non-small-cell lung cancer, and melanoma later this year.

While ABRAXANE certainly has upside potential, the nab technology on which it's built is the key to Abraxis' future. The technology incorporates a drug into a nanoparticle bound by the natural albumin protein. ABRAXANE incorporates paclitaxel -- the generic version of Taxol -- but the list of potential drugs that could use the nab technology is practically endless.

Abraxis will start clinical trials for the microtubule stabilizer nab-docetaxel this year, and the FDA recently approved its Investigational New Drug application for the mTOR inhibitor nab-rapamycin. Abraxis won't see profits from any of these drugs for quite some time, but if ABRAXANE is any indication of how nab technology can make a good drug better, we should see many of these drugs get the FDA's thumbs-up.

Of course, all these clinical trials cost big bucks, so part of the companies' restructuring includes $1.45 billion in financing, $1 billion of which is earmarked for developing the nab platform. Combined with the income from sales of ABRAXANE, that wad of cash should get the new Abraxis off to a nice start.

Good decision?
For investors who don't own Abraxis -- myself included -- the move is certainly a positive one. We'll be able to evaluate the two aspects of the company independently, with the option to invest in the one that we feel will increase profits the quickest. Personally, I like to evaluate pipelines, so I'm more interested in what Abraxis is will do with its nab technology. However, the generic drug industry has been doing quite well lately, and it has potential to expand if Congress allows the FDA to approve follow-on biologics. Perhaps I'll buy both.

It's unclear to me whether this is the best move for current investors. After the split, investors will certainly have the option to sell the half of the business that they think is least likely to succeed. The transaction is expected to be tax-free for investors, but I hope current investors enjoy doing the math required to figure out their tax basis when they sell. More information about the transition into two companies will be available to investors when the company files a form 10 registration with the SEC in the third quarter. The transaction is expected to be completed in the fourth quarter.

The only place I can see the breakup causing increased expenses in the new companies is in the sales force. In smaller markets, the salesperson could double up and sell both hospital-based products and ABRAXANE. After the companies have divided, doubling up won't be possible, although as Abraxis BioScience develops more products, that should become less of an issue.

It will be a few years before investors know whether the breakup was beneficial to the new companies. I'm most unsure about Abraxis's ability to effectively use its financing to push the drugs in its pipeline through to FDA marketing approval. The company probably could have gotten financing without the breakup. But now, at least, investors in the new APP won't have to worry about clinical trials.