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Friday, January 16, 2004 5:43:38 PM
Here's another Chop job, that got published yesterday on AAII, a drug company I had some bucks in (up until last week.) Could be some snippets of fact in here, but a bit overdone ala the IDCC article.
JL
Pharmaceuticals
Big Headaches For AaiPharma?
Elizabeth MacDonald, 01.15.04, 12:41 PM ET
NEW YORK - Questions are mounting for AaiPharma. But try telling that to Wall Street.
Five of the seven investment houses who cover the stock have a buy rating on it, including Wachovia Securities, Banc of America Securities and CIBC World Markets (all of whom, no surprise, have big pieces of AaiPharma's [nasdaq:AAII] credit).
These analysts seem to believe that the Wilmington, N.C., company has a painless way of making profits by buying potential has-beens in pain pills on the cheap. AaiPharma markets narcotics such as Darvocet and Darvon, drugs that in an age of Vicodin and Percoset summon up quaint images of apron-clad country club wives knocking back their mothers' little helpers with bourbon.
But analysts at Raymond James & Associates have been raising red flags for months now about AaiPharma's quality of earnings. In a series of withering reports the two analysts raise questions as to whether the company is "channel stuffing," or unloading inventory onto wholesalers in order to make sales.
And now SEC Insight raises concerns that the company may have a regulatory problem on its hands. The Plymouth, Minn., newsletter tracks inquiries from the Securities & Exchange Commission into corporate accounting via Freedom of Information filings.
AaiPharma didn't return phone calls or e-mails for comment.
Despite the questions, AaiPharma stock, currently trading at $29.48, has been hitting new highs and enjoys a sweet $821 million market cap: decent stuff for a company with just $11 million in cash and equivalents and $260 million in long-term and other debt. Though the company has $268 million in trailing 12-month revenues, Raymond James figures the company has about $8.35 per share of long-term debt versus cash of only 38 cents per share.
In posting their sell ratings on the stock, the drug analysts, Raymond James' Michael Krensavage and Michael Bailey, reiterated earlier concerns from their July report, in which they raised questions as to whether AaiPharma may be inflating its earnings by stuffing the channel. At that time, AaiPharma had four to five months of inventory on its hands when the industry average is one month.
For example, the two analysts at that time noted that in prepared comments for a conference call, the company said that inventories of its best-selling product, Darvocet-N 100, stood at less than six weeks. But the two analysts noted that the company neglected to mention that inventories for a 500-pack of the drug stood at eight and a half months.
To date, the two are sticking to their guns, writing in their latest December report that "inventory in the hands of wholesalers remains bloated" and that "our data indicate that about half [of] aaiPharma's earnings stem from channel fill."
Another concern: The two analysts also note that the company is buying its earnings. Though AaiPharma recently increased its 2004 earnings guidance by 7 cents per share, to a range of $1.45 to $1.52, Krensavage and Bailey figure that "at least 25 cents per share" of those earnings, "but probably a greater amount," actually comes from four drugs that the company bought for $103 million from drugmaker Elan (nyse: ELN - news - people ).
Translation: Though the company raised its earnings estimates by 7 cents a share for 2004, when you subtract out its purchase of drugs from Elan, which added 25 cents per share, its earnings actually deteriorated by 18 cents per share. "We view the Elan purchase as a temporary remedy to a failed business plan," the analysts note, and that without the acquisition, "AaiPharma's core business is deteriorating."
The two expect earnings per share to decline from what they project at $1.03 this year to 57 cents in 2005, as royalties on Prilosec, its heartburn drug, start to disappear in the first quarter of that year. The analysts also note declining prescription trends for Darvon.
Moreover, SEC Insight raises questions as to whether the SEC is investigating the company. The newsletter says the agency refused to comment on a routine query, neither confirming or denying if records exist on AaiPharma. The newsletter notes that in April 2002, the agency found accounting problems and halted a registration for an offering, which the company eventually pulled, blaming poor market conditions.
JL
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