Analysis: Cambrex fights contract loss, Mylan dispute

11 April 2003 17:00  [Source: ICIS news]

NEW YORK (CNI)--Not long ago a darling of Wall Street, Cambrex saw its shares plunge by more than a third recently as it dramatically slashed 2003 profit projections in the face of the loss of a major contract biopharmaceutical manufacturing customer, a tentative legal settlement with Mylan Laboratories and competitive pricing pressures.

Shares of the East Rutherford, New Jersey-based fine chemicals producer closed just above their 52-week low Thursday on the New York Stock Exchange at $16.30 - well below the 52-week high of $43.94.

The downturn follows an announcement by Cambrex that it expects to take an after-tax charge of around $8.5m (Euro7.8m) related to the settlement, bringing 2003 earnings/share (eps) to $1.05-1.25. Even excluding the charge, however, forecasted eps of $1.37-1.57 falls far short of the company's January guidance of earning between $2-2.15/share.

"There seems to be a relatively large gap between the earnings shortfall and what they could quantify as contributing to that shortfall. The rest had to do with competitive price pressures across the business line," said First Analysis Securities analyst Tracy Marshbanks. "That's the important issue in the long term."

JPMorgan analyst Jeffrey Zekauskas said: "Cambrex's current low share price is more a reaction to disappointed near-term growth expectations rather than an indication of fundamental long-term weaknesses in its business model. We believe the company is capable of putting its core operations back on a reasonable growth track."

The loss of a major biopharmaceutical contract stemming from the failure of a customer's therapeutic to gain Food and Drug Administration (FDA) approval will be a large contributor to the profit shortfall.

"The filed therapeutic we were making was for distribution by our customer in Europe where it already has been approved," said Cambrex chairman and chief executive James Mack.

Mack said: "Unfortunately, when the therapeutic failed to win a new drug application approval in the US, our customer opted to in-source manufacturing to serve the European market."

The project is now expected to contribute around $7.5m in sales in 2003, primarily in the first half, versus $17.5m in 2002.

Mack said: "We are building the business, which is in its early days, and setbacks like this will occur from time to time. However, we remain optimistic about the bioprocessing industry and are confident in our business model. The nature of this business is that it tends to be lumpy quarter to quarter, and we are working hard to increase and diversify our pipeline in custom development and custom manufacturing projects to reduce the impact of clinical trial attrition and obtain our former growth targets."

"It's a lumpy business but you don't expect lumps like that," said Marshbanks.

Marshbanks said: "The lump in biomanufacturing you're typically worried about is a non-commercial product you're making for clinical trials that fails. This is an anomaly because it was a commercial product approved in Europe that they were producing and were counting on continuing to produce, and they lost it because of the failure to get approval in another geography. You typically don't think you're going to lose your ongoing commercial business."

Cambrex's biosciences segment also is suffering from a general market contraction from fewer FDA approvals on new drug applications, lower investments in biotechnology and overall market uncertainty resulting from the political and economic environment. Overall, the company forecasts flat-5% growth for biosciences segment sales in 2003 versus $163m in sales last year.

To counter regulatory risk, Cambrex is taking steps to diversify its contract of biopharmaceutical projects, adding personnel to improve sales and commercial development efforts and increase the number of late-stage (Phase III) clinical trial projects under contract.

"Only one of the products Cambrex is currently manufacturing [in biopharmaceuticals] is a licensed therapeutic and this is not subject to the risk of regulatory failure," said Zekauskas. He notes that most products under biopharmaceutical manufacturing contracts are in clinical trials (Phase I to Phase III) and thus subject to the risk of not obtaining approval.

On a positive note, Cambrex has announced a contract from Tercica Medica for the large-scale clinical and commercial production of insulin-like Growth Factor-I, a hormone central to human growth and metabolism.

Along with weakness in biosciences, Cambrex also trimmed the sales growth estimate for its human health segment to 3-7% versus prior guidance of 5-7% on more competitive market conditions and increased pricing pressure.

Cambrex said market demand in its human health segment indicates an increasing number of smaller projects and a shift in the number of custom development inquiries from emerging innovators to traditional pharmaceutical companies.

The tentative legal settlement with Mylan Laboratories involves a payment from Cambrex of around $13m to settle claims that both companies sought to restrict competition in active pharmaceutical ingredients lorazepam and chlorazepate for the treatment of anxiety. The settlement would indemnify Cambrex against all future liabilities related to these products.

The deal with Mylan surprised some investors since Mylan settled with the Federal Trade Commission (FTC) in 2000 for more than $140m on behalf of itself, Cambrex and Cambrex subsidiary Profarmaco.

In late March, Mylan agreed to pay $27.9m of a $35m settlement in a class action suit brought by purchasers of clorazepate and lorazepam. In turn, it implored Cambrex to contribute funds to its latest settlement.

"When a good customer comes to you and asks you to help out and you face future liability anyway, it's a little hard to tell them to pound sand," said Marshbanks.

He said: "This is a way to maintain an amicable customer relationship and take its own future liability off the table. It's unlikely that Mylan will come back for more."

As for Cambrex's business model, Wall Street remains largely positive, viewing the recent events as a temporary setback in a difficult environment.

Said Marshbanks: "We like their strategy of going after protected niches in small molecules, biologics early in the development pipeline and not having capital chase volume. But clearly they have challenges and they're not alone. When you take a look at how much money was pumped into their biopharma customer base in the late 1990s, and then look at how much wasn't in the past couple of years, a lot of players are rethinking where they spend their resources in moving therapeutics ahead."

JPMorgan's Zekauskas expects improvement in some areas in 2004.

He said: "We expect the biosciences segment, excluding biopharmaceutical manufacturing, to grow in the next year, both in Europe and the US, stemming from sales of human cell and media systems and cell culture media and sera driving the growth."

(For additional Chemical Market Reporter analysis visit the CMR Web site at: http://www.chemicalmarketreporter.com/.)

By: Joe Chang, Chemical Market Reporter
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