American Pharmaceutical Partners, Inc.

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American Pharmaceutical Partners, Inc.

1101 Perimeter Drive, Suite 300
Schaumburg, Illinois 60173-5837
U.S.A.
Telephone: (847) 969-2700
Toll Free: (888) 391-6300
Fax: (800) 743-7082
Web site: http://www.appdrugs.com

Public Company
Incorporated: 1996
Employees: 1,212
Sales: $351.3 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: APPX
NAIC: 325412 Pharmaceutical Preparation Manufacturing

American Pharmaceutical Partners, Inc. (APP) is a publicly traded specialty pharmaceutical company based in Schaumburg, Illinois. Often during its brief history, the company has been at the center of controversy and at times skirted scandal. Its chairman, Dr. Patrick Soon-Shiong, owns about 70 percent of APP through his control of another company, American Bio-Science. Over the years, the results of much of his research have been questioned, and he also has been involved in a number of disputes with business partners, including an estranged brother who fired Soon-Shiong and sued him in the 1990s. Wall Street short-sellers have been gunning for APP since its 2001 initial public offering (IPO), convinced that Soon-Shiong's high-wire act was due for a fall. In particular, his doubters question claims about the effectiveness of a new cancer drug for which APP has been seeking Food and Drug Administration (FDA) approval, a case that has prompted the Securities and Exchange Commission to review and consider launching a formal investigation. Despite the notoriety surrounding its attempt to launch its first proprietary blockbuster drug, APP has developed a very profitable business in injectable pharmaceutical products, offering more than 150 generic injectables in more than 300 dosages, focusing primarily on the oncology, anti-infective, and critical care markets.

Founder's Launch of Entrepreneurial Career in the 1990s

Soon-Shiong was born in 1952 in South Africa, a child of parents who emigrated from China during World War II. He was a top student at the University of Witwatersrand's medical school, then became a resident at Johannesburg's General Hospital. He came to the United States in 1983 to take a faculty position at UCLA's medical school. After performing the school's first pancreas transplant, he was asked to start a transplant program, but he declined. Instead, he pursued less invasive ways to treat diabetes. He revisited a technique used a decade earlier, which transplanted islet cells capable of producing insulin inside the pancreas. Researchers had failed previously because the patient's immune system destroyed the cells before they could provide insulin. In 1987 Soon-Shiong devised a way to work around the problem by encapsulating the islets in a gel made from seaweed. He reported great success in his early research, but his peers were far from convinced. In 1991 Soon-Shiong left UCLA to form VivoRX Inc. and VivoRx Diabetes Inc. with his brother Terrence in order to continue his diabetes work, as well as to conduct research on encapsulating other drugs to prevent side effects.

In 1993 Soon-Shiong received permission from the FDA to conduct human trials, and he transplanted his alginate capsules in the pancreas of a 38-year-old patient named Steven Craig, who had been a severe diabetic since childhood. Craig was weaned off insulin over the next several months, then went an entire month without an injection. Soon-Shiong trumpeted his success to the press and became something of a minor celebrity on the TV talk show circuit and at diabetes conferences. By hyping his results before he had published his research in a peer-reviewed medical journal, Soon-Shiong angered many in the research community, but he did succeed in garnering the attention of Mylan Laboratories Inc., which in June 1994 paid $5 million for a 10 percent stake in the Los Angeles-based VivoRX companies and provided $200,000 a month in research funds. Mylan also paid for a license to market Soon-Shiong's diabetic treatment after it gained FDA approval. In addition, Soon-Shiong formed another company to pursue cancer research, VivoRx Pharmaceutical, in which Mylan acquired a 10 percent stake for just $1,000. The company would eventually change its name to American BioScience. Another company that decided to fund Soon-Shiong was Premiere Inc., a major hospital buying group, which in 1996 invested $4 million in his research companies.

Launching APP in 1996

Soon-Shiong was having difficulty reproducing the results he had achieved in Steven Craig, and he began turning his attention to cancer research and the launch of another venture, American Pharmaceutical Partners. (Craig in the meantime continued to praise Soon-Shiong's treatment, but in 1998 committed suicide, which according to his widow was the result of Craig's despondency over his poor health.) Premiere in 1996 helped to fund the start-up of APP, which soon began to broker generic drugs to hospitals, taking advantage of its relationship with Premiere to gain business. In July 1997, at a time when APP owned no factories, produced no drugs, and generated sales of just $85,000, Premiere named APP as one of its "corporate partners," putting the tiny company on a par with a select fraternity of multinational companies, including Merck and Johnson & Johnson. Because of its cozy relationship with Premiere, which benefited from APP's success by acquiring additional shares of stock based on sales, APP attracted customers such as Fujisawa USA, which correctly surmised that it would be able to do more business with Premiere, supplier to 1,500 hospitals, if it went through APP. In effect, APP became a "toll taker" for Premiere. APP then began working with other buying groups, including the largest, Novation, to which APP paid a fee based on its hospital sales.

In 1998 APP added a manufacturing base by acquiring Fujisawa USA, a money-losing injectable generic drug operation. APP picked up two manufacturing plants located in Melrose Park, Illinois, and Grand Island, New York, as well as 94 different product lines and 193 approved product codes. Fujisawa had lost money for nine straight years, yet APP, because of its ties to buying groups, was able to turn the business around in just six months. But the company was troubled with quality control problems that predated APP. In November 1998 APP had to withdraw its antibiotic gentamicin, which was making patients sick. Several months later the company resumed selling the drug only to have additional patients become sick. It fell upon the FDA to discover that one of APP's Chinese suppliers was in substandard condition. Once a change of suppliers was made, the problem was solved. But the company continued to have problems with other drugs as well. FDA inspectors in 1999 found Adenoscan was being produced in chipped and leaking glass vials, and APP was able to avoid legal action only by recalling the product. Another drug, oxytocin, also was recalled in 1999.

Even as Soon-Shiong was growing APP in 1998 through the Fujisawa acquisition, he was falling out with his original partners, brother Terrence and Mylan, who were displeased that he had allowed his diabetes work to be ignored. Mylan sued both brothers, and Terrence in turn fired Dr. Patrick Soon-Shiong and sued him for fraud, accusing his brother of using VivoRX-paid consultants to conduct cancer research at American Bioscience. In early 1999 the matter was submitted to arbitration, clearing Patrick Soon-Shiong, who was then rehired by his brother. But a year later another suit was filed. The matter would not be settled until another year had passed, at which point Dr. Soon-Shiong agreed to pay $32 million to his brother and Mylan. But Soon-Shiong could well afford to pay after becoming a billionaire following an IPO of stock in APP.

The appeal of APP to investors was not the company's profitable and growing injectable generic drug business. Rather, it was an experimental cancer treatment called Abraxane, which Soon-Shiong had been developing through American Bioscience. Abraxane was similar to Soon-Shiong's diabetes treatment in that it encapsulated paclitaxel—the active ingredient found in Taxol, the best-selling chemotherapy drug—within a nanoparticle-size ball of human protein. The protein provided protection for the drug so that it could arrive in a concentrated form when it reached a cancerous cell. Moreover, one of Taxol's most toxic components was removed, which allowed Abraxane to deliver ever higher doses while eliminating side effects. In 1999 American Bioscience granted North American rights to APP for $60 million and another $25 million in milestone payments. It was an arrangement questioned by Soon-Shiong's detractors, who pointed out that the arrangement provided financial protection for Soon-Shiong and the other private investors of American Bioscience at the expense of APP shareholders. The prospectus for APP's 2001 offering disclosed the licensing terms, but investors were more attracted by the promise of Abraxane to be overly concerned about Soon-Shiong's less-than-savory downside protection scheme. He also was involved in another controversy relating to Abraxane. As Bristol-Myers's exclusive right to market Taxol neared expiration in 2000, Soon-Shiong applied for and received a patent for an experimental form of Taxol, then sued Florida-based Ivax Corp. to keep it and other firms from marketing a generic version of the drug. Ultimately a federal court removed the names of Soon-Shiong and two colleagues from the patent, ruling that the drug had been developed by Florida State University scientists. In 2000 the Federal Trade Commission (FTC) looked into the matter as well, to make sure APP had not colluded with Bristol-Myers in an effort to keep cheap generic versions of Taxol off the market. APP maintained that it had simply been attempting to protect its position regarding Abraxane. Then, in June 2002, 29 states sued Bristol-Myers, alleging that it conspired with APP to keep generic versions of Taxol off the market, thereby costing the states and cancer patients billions of dollars. Although APP was not a defendant in the case, it was named as a co-conspirator.

Company Perspectives:

American Pharmaceutical Partners, Inc. (APP) is a strategically integrated pharmaceutical company that manufactures, markets and develops injectable products, with a focus on oncology and anti-infectives.

IPO in 2001

Despite the mounting questions surrounding APP and its chief executive, investors were not scared away. APP's initial offering was completed in December 2001, raising $144 million for the company. Yet controversy continued to dog the company, the result of a March 2002 New York Times exposé concerning the cozy relationship between Premiere and APP. The FTC began looking into the matter, as did Congress. To relieve the pressure Premiere sold back its stake in APP to the company for $31.8 million. It also changed some of its practices, promising to discontinue investment in supply companies and to broaden the number of companies with which it contracted. Questions also arose for APP in 2002 regarding the clinical trials underway for Abraxane, which was being touted as having the potential to produce $500 million in annual sales for APP. During an October conference call with analysts it came to light that some of the cancer patients enrolled in the trials had never been treated with any chemotherapy. Although APP maintained that its patient mix had been approved by the FDA, there were still concerns that by using Abraxane as a firstline drug, the results would be skewed, making the treatment appear more effective than it might actually be. The company's stock dropped sharply following the revelation. It was mostly on Wall Street that APP was held with some suspicion, as short-sellers borrowed every available share in anticipation of the company's collapse. Small-time investors, on the other hand, the ones who populated the Yahoo! Financial message boards, were enamored with the company and believed that some people on Wall Street were conspiring to sabotage the stock. One analyst, Kevin McNamara of Sterling Financial Investment Group, wrote a critical assessment of APP in 2003 and became the recipient of abusive e-mails and phone calls that terrorized his family.

Despite the questions about the patient mix in Abraxane's clinical trial, the FDA granted the treatment fast-track status in January 2003. In the meantime, the company's injectable generic drug business was thriving, as it received FDA approval on numerous products. Sales totaled $192 million in 2001, then grew to $277.5 million in 2002, and $351.3 million in 2003. Net income during this period improved to $71.7 million in 2003. But many investors were still uncertain, focusing on APP's efforts with Abraxane. In September 2003, the company claimed in a press release that phase three clinical trials showed Abraxane outperforming Taxol, but because no supporting details were provided, Wall Street cut the price of APP's stock by a third, reducing the company's market value from $3 billion to $2 billion. Soon-Shiong said that he would provide details at a scientific meeting, but researchers also were dismayed by the omission. Shareholders were displeased as well, and APP was soon hit with shareholder lawsuits alleging the company had released misleading information about Abraxane and that Soon-Shiong had unloaded 300,000 shares before the stock tumbled.

Finally in December 2003, APP released the supporting data from the clinical trial, which on the surface showed Abraxane to be far more effective than Taxol in fighting breast cancer. The price of APP shares quickly rose, only to sink again as critics began to pick apart the study, in particular that fact that about 75 percent of the patients were from Russia, hardly the usual site for such a study. In addition, the Russian trial produced much lower results for Taxol than had been produced in other studies. The company still hoped to receive FDA approval based on this study, but the results were far from stunning, and due to emerging competition in the cancer field it was becoming far less likely that Abraxane would ever become the blockbuster product Soon-Shiong had envisioned. Moreover, APP was again the object of government scrutiny, as the SEC began to take a look at whether APP had misled investors by exaggerating Abraxane's potential. A formal investigation, however, would require approval from the SEC commissioners. As of September 2004, no such investigation had yet been launched. A few weeks later, Soon-Shiong stepped down as APP's CEO, turning over the job to Alan Heller, a former president of Global Renal operations at Baxter Healthcare Corporation and executive vice-president and president of G.D. Searle. Soon-Shiong stayed on as executive chairman, electing to concentrate on "strategic initiatives" and the researching of new proprietary injectable pharmaceutical products.