Bill Simpson wrote an analysis of Talecris Biotherapeutics (TLCR) to TradingIPOs subscribers. In its market debut Thursday, October 1, the company priced 50 million common shares for $19 each, within the estimate range.
The text of Mr. Simpson's original writeup follows:
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Talecris Biotherapeutics plans on offering 44.8 million shares at a range of $18-$20. Insiders will be selling 15.8 million shares in the deal. If over-allotments are exercised, insiders will be selling 22.5 million shares in the deal. Morgan Stanley, Goldman Sachs, Citi, and JP Morgan are leading the deal, Wells Fargo, Barclay's and UBS co-managing. Post-ipo TLCR will have 119.8 million shares outstanding for a market cap of $2.27 billion at $19. IPO proceeds will be used to repay debt.
Private equity outfits Cerberus and Ampersand will own an entity that owns 60% of TLCR post-ipo. Cerberus and Ampersand are the selling shareholders on ipo. The two private equity outfits acquired TLCR from Bayer in 3/05. Note that in 2006, Cerberus and Ampersand laid significant debt on the back of TLR to fund $830 million in dividends, the bulk of which went to Ampersand and Cerberus.
TLCR attempted to merge with CSL in 8/08 for a total price of $3.1 billion, less net debt. Factoring in debt on the books at the time of $1.1 billion, total considerations were $2 billion. In 5/09, the US Federal Trade Commission filed suit to block the merger. CSL and TLCR cancelled the merger with TLCR receiving $75 million in cash.
From the prospectus:
'We are a biopharmaceutical company that is one of the largest producers and marketers of plasma-derived protein therapies in the world. We develop, produce, market and distribute therapies that extend and enhance the lives of people suffering from chronic and acute, often life-threatening, conditions, such as chronic inflammatory demyelinating polyneuropathy (CIDP), primary immune deficiencies (PI), alpha-1 antitrypsin deficiency, bleeding disorders, infectious diseases and severe trauma.'
In 2007, TLCR had a 24% North American share in plasma proteins and a 12% worldwide share.
TLCR's largest product is Gamunex. Gamunex, launched in 2003, is one of the leading products in the intravenous immune globulin (IGIV) segment. Gamunex has demonstrated efficacy, safety, and patient outcomes in more FDA approved indications than any other liquid IGIV. Gamunex is the only IGIV approved for the treatment of CIDP, a neurological indication, in the U.S., Europe and Canada. The Gamunex IGIV share of sales in 2007 was 27% in North America and 16% globally.
Second largest product Prolastin (Alpha 1 Proteinase Inhibitor) had a 67% share of sales in the United States in 2008 and a 76% share of sales worldwide in 2007. Prolastin is used to treat emphysema.
Gamunex and Prolastin represented 72.3% of TLCR's 2008 revenues. Both are designated as 'orphan drugs' to serve populations with rare, chronic diseases.
Plasma products - Plasma contains many therapeutic proteins which the body uses to fight infection, regulate body function, and control bleeding and clotting. Plasma is processed and purified to create different product classes addressing a range of therapeutic needs.
Plasma products industry - The human plasma-derived products industry was $9.7 billion in 2007. U.S. sales have grown at a compound annual rate of approximately 10% over the past 18 years with sales of $4.0 billion in 2008, a 13% increase over 2007. There are extensive barriers to entry in the segment as all plasma products in US must have US sourced plasma. In addition there are intellectual property hurdles, FDA regulations, and extensive capital expenditures. Note unlike many pharmaceuticals, plasma-derived protein therapies are usually protected through intellectual property and not patent protections. Result is no patent expiration dates.
TLCR expects the worldwide unit volume demand for plasma-derived products will grow over the long-term at a compound annual rate of approximately 6% to 8%.
Until 2006, TLCR sourced their plasma from third parties. Since then they have opened/operated 69 plasma collection centers. TLCR believes they have current access to direct plasma sourcing to meet future needs. In addition, TLCR processes their own plasma to form proteins via a manufacturing plant in North Carolina.
66% of revenues are derived in the US. Three customers accounted for 37% of revenues first six months of 2009.
Competition - Gamunex has seen increased competition the past 5 years. Competitors include Grifols, Octapharma, Baxter (BAX), and CSL. In addition both Omrix (OMRI) and Biotest are seeking approval for liquid IGIV products.
Litigation - In 5/08 Baxter filed a complaint against TLCR claiming patent infringement on patents dealing primarily with a method of screening large numbers of biological samples. Suit is in early stages.
R&D - TLCR has approximately 275 scientists on staff and is consistently engaged in bringing new plasma proteins to commercial stage.
Debt - TLCR will have debt on the books post-ipo, approximately $600 million. The good thing here is that TLCR is using all shares sold by them to repay debt. The bad news is that remaining post-ipo debt servicing will eat up approximately 16% of 2009 operating income.
Note - 2009 GAAP earnings will include $75 million in early termination fee. As this is a one-time non-recurring event, I folded this out of numbers below. As usual, I also used pro-forma debt servicing assuming post-ipo debt levels existed the entire 2009. Doing both gives us a better look at the post ipo TLCR earnings power.
Growth has been slow and steady. Revenues grew 10%+ in 2008 and 21% the first six months of 2009. Good news for TLCR is that most of the 2009 revenue increase has been due to higher volumes sold rather than higher prices.
Gross margins have improved significantly in 2009. TLCR continues to source greater amounts of their own plasma (instead of purchasing through a third party competitor) and this has positively impacted gross margins. Should also add that plasma collection center start-up costs in 2007 and 2008 negatively impacted gross margins. 2009 looks to be a little better indicator of gross margins going forward, a good sign for TLCR.
2009 - Revenues appear on track for $1.51 billion. TLCR sells a lot of plasma proteins. Gross margins look to be in the 41%-42% range. Operating expense ratio is 23%, operating margins should be 19%. As noted above, debt servicing will eat up approximately 16% of those operating margins. Plugging in debt servicing and taxes, net margins should be 10%. Earnings per share should be $1.25. On a pricing of $19, TLCR would trade 15 X's 2009 earnings.
Conclusion - Large successful plasma protein therapy manufacturer. TLCR is coming public in the midst of a very strong 2009. The improvement in revenues (20% gain) and gross margins esily overshadow the debt servicing drag. This is not a high growth sector, however TLCR has managed to grow their revenues solidly the past 18 months. Big risk here is that a competitor eats into their market share leadership in either of their two leading protein therapy products.
TLCR appears rather well positioned to continue as a leader in the US plasma protein therapy market. This is a solid ipo in an interesting sector. Recommend in range.