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Don't Let A Sciele Happen To You

By Stephen Simpson

Tickers in this Article: MYL, SNY, BAYRY, AZN, SCRX

Tuesday was a good day for investors in specialty pharmaceutical company Sciele Pharma (Nasdaq:SCRX), as the company agreed to a buyout. In exchange for $1.1 billion in cash ($31 per share), Sciele will become a subsidiary of Japan's Shionogi. Even if you bought these shares at the worst possible time, the day before Christmas in 2001, you still have a tiny profit to show for it, and if you bought in the last six months you have a gain in the neighborhood of 50%. (Missed this one? Read our article Trademarks Of A Takeover Target for some tips that can lead you to little companies with big prospects.)

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Then again, if you're like me, you have a gain of bupkus. But we'll get to that in a moment.

The Company that Was
Sciele is a small specialty pharmaceutical company focused on cardiology, diabetes, women's health,and pediatric medicine, but it garnered a significant percentage of its revenue from a single drug - the hypertension drug Sular. The company's modus operandi had generally been to acquire products from companies like AstraZeneca (NYSE:AZN), Bayer (OTC:BAYRY) and Sanofi-Aventis (NYSE:SNY) and give them a level of sales and marketing attention that didn't fit into these larger companies' plans.

For the most part, the plan had been working. Revenue had grown fairly steadily since 2000, and although operating income had been a bit more volatile, it too had been growing well. So why sell?

An Offer They Couldn't Refuse
The first possible answer to why Sciele sold out to Shionogi could be quite simple indeed: The price offered represented a very reasonable valuation for the company and the nature of the deal would seem to indicate that the company won't be dramatically altered. In fact, Shionogi says it doing this deal to expand its commercial profile in the United States, so it wouldn't make sense to upset the apple cart too much.

It is also worth noting, however, that Sciele had some meaningful near-term challenges. Mylan (NYSE:MYL) recently introduced a generic form of Sular, and there had to be some concerns about whether Sciele would successfully move patients to a new (non-generic) formulation called Sular Geomatrix. Combine that competitive threat with a more difficult environment all around for pharmaceutical companies (suggesting to me that fewer pharmaceutical companies are looking to sell profitable products), and I can understand how the Shionogi offer looked too good to refuse.

The Lesson
There's a further-reaching lesson about Sciele Pharma that I would like to share. I had this company pegged at the top of my watchlist for a few months now. Yet, I never pulled the trigger and the return on all my work is a big fat zero.

So why did I dither? I was certainly curious to see how generics might impact Sular, but that's really just an excuse. The truth is that I let the markets lull me into a false sense that I had plenty of time to wait. What's more, in retrospect I dragged my feet on doing the final due diligence I needed to ultimately write the ticket and pull the trigger. After all, I have a day job just like you!

By no means am I suggesting you should shortcut your due diligence or rush to buy any stock that seems like a good bargain. After all, I'm sure that if I tallied up all of the missed gains and narrowly-avoided disasters, I come out ahead for having some tortoise-like characteristics. But all that said, you can't make any money on a stock if you don't actually take a position in it. So just remember, do your research, but don't forget to actually buy the stocks you like!

To get started on your own research, read Due Diligence In 10 Easy Steps.

By Stephen Simpson

Stephen Simpson, CFA, has worked as an equity analyst for both sell-side and buy-side investment companies, and presently works as a sell-side equity research analyst. He has worked as a consultant for the healthcare sector, and has written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson is the editor of Kratisto Investing, a website devoted to financial analysis and personal commentary.

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