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September 17, 2009 – Comments (8) | RELATED TICKERS: MOH , WLB.DL2 , VPHM.DL

No don't worry, I'm not going to be hitting any high notes. Instead I'm going to take a speculative look at three companies that I think would make perfectly good buyout candidates in this environment. As usual, and I'll just pull a page right out of the binve files here, this does not constitute investing advice and is merely my opinion on what "could" come to be.

Case #1: Molina Healthcare (NYSE: MOH)

Molina Healthcare is a healthcare provider in ten states that provides healthcare services to low-income families and business through state-funded Medicaid and primary care clinics. Molina is a relatively small company compared to the 10-12 other giants in this industry but what it does, it does well.

Molina has been run as a profitable company for years now with a huge cash reserve of 432 million dollars once you factor out the debt. Compare that to the 529 million dollar market cap and you can see a company that is producing 55 million dollars in profits a year trading at just 97 million dollars over its current cash value. That is downright dirty cheap right there! You also have a company in Molina that has been run by its founders since its inception in 1980. Have I ever mentioned how much I appreciate management loyalty, especially in the healthcare business?

Needless to say Molina is a well run company with one main issue, its medical cost ratio, specifically in California where a large chunk of its business comes from. Theoretically, the lower your medical cost ratio, the higher the margins and the better the profits. Each dollar you spend is going farther. Molina has always been particularly poor when it comes to the medical cost ratio as was evidenced by their 86.4% cost percentage in their most recent 10-Q. Competitor Wellpoint for instance runs a cost ratio closer to 79% with the average in the industry being closer to 80-82%. This simply means that Molina has to try even harder with what it has to turn a profit.

Also playing against Molina has been the recent outbreak of the swine flu which as you all know by my previous blogs is well overplayed. Despite my thoughts on the subject it has greatly increased medical costs going into the flu season this year. Despite these rising medical costs though we've seen premiums rising and organic membership in Molina's plans growing. In the end though it is California which could be the life or death of Molina. Molina maintains a cost ratio of 93% in CA which basically means it's not profitable there yet. Representing such a large chunk of their revenue this is where I see a buyout offer making sense from Wellpoint (NYSE: WLP).

Wellpoint also has a massive presence in California, known for their Blue Cross and Blue Shield health plans. They operate out of 46 states and their medical cost ratio is among the best in the industry. More importantly, WLP is also incredibly smart with their money, and sitting on such a large pile of cash (8.2 billion after debt), they would see tremendous upside in acquiring Molina.

The primary synergy would be felt if either California or even the US government enacted a universal healthcare plan (sort of like what Obama is trying to get through right now). Molina would be benefitted greatly by any sort of universal plan because it would reduce their high medical ratios by bringing in more potential clients and laws in the plan which would require certain levels of medical spending on patients wouldn't apply to MOH since their patient care costs are already particularly high. Wellpoint on the other hand would be hurt by higher medical cost requirements and would benefit by picking up the already profitable, high in cash Molina, if anything just for their California health care members.  

If I had to take a stab at it, I would place the price it would take to acquire Molina at $42 per share.

Case #2: Westmoreland Coal (AMEX: WLB)

Westmoreland Coal is absolutely the oddball on this list because it's actually a very poorly run company. Westmoreland produces and supplies coal to the energy industry in order to create energy. It has three mining interests in Montana, one in North Dakota, and one in Texas. Apparently they also own a power generating facility as well. What really has me interested here though are the five mines.

Westmoreland as I've mentioned is a poorly run company which has produced losses for as long as I can remember. How this company is mired in only 255 million dollars of debt boggles my mind but in retrospect I figure it could be much worse. Westmoreland's profit margins lag the industry average as well, but there is one thing the company has that its largest competitors do not, and thats a North-Central United States coal mine exposure. Most of their large competitors are stuck on the East coast or in the Southeast with Westmoreland really holding the only major mines in the North-Central US. Remember, in the commodity industry its never about how much money you make, but how much land you own and what you could theoretically do with it!

With that being said I can see Consol Energy (NYSE: CNX) being the perfect match for Westmoreland. Consol Energy is the largest beast in the coal sector with the majority of its mines being located in the Appalachian Basin. Westmoreland would give the company considerably more exposure and could potentially cut costs at Westmoreland over 10-15% based on the fact that Consol Energy's management is efficient! I could see these cost savings even potentially spilling over to transportation and staffing savings.

I would predict that Consol would purchase Westmoreland in an all stock deal worth about $12 a share, which I feel is more than fair given how poorly the company has been run in the past five years.

Case #3: Viropharma (NASD: VPHM)

Viropharma is a biopharmaceutical company that is engaged in developing and commercializing drugs which help treat serious diseases. Currently the company has one blockbuster product in Vancocin, and just finished the purchase of Lev Pharmaceuticals so it could acquire a second product in Cinryze. VPHM also have a few other products in its hopeful pipeline, most notably Maribavir.

Viropharma has a lot going for it, particularly the very high margins of their existing products Vancocin and Cinryze which can be well in excess of 80-90%, and a strong balance sheet. Viropharma maintains 132 million dollars cash on hand after debts compared to a market cap of just 661 million dollars.

Problems exist however, otherwise Viropharma would have gone through the roof by now. Maribavir continues to have setbacks in its Phase II and III trials which signal that it may not be as effect as once thought in treating cytomegalovirus disease. In addition, Vancocin has been brutalized over the last year by increasing competition from generic producers which have really eaten into their profits. VPHM definitely has the partnerships to succeed, GlaxoSmithKline, Eli Lilly, Sanofi-Aventis and Schering Plough, but only one of these partners has a dire need to purchase Viropharma and the winner is.... Eli Lilly.

Eli Lilly is the company that originally sold its rights to Vancocin within the United States and now it seems prudent that they re-acquire them through Viropharma. VPHM does have a few products in its pipeline which is a lot more than Eli Lilly can say right now. LLY is going to be dealing with a massive amount of patent expirations in 2011-2012 and it seems smart here for them to lock up both Viropharma's potential drugs as well as VPHM's cash balance. The jury is still out on Maribavir but even without it, Eli Lilly would be smart to make a play for Viropharma.

I suspect that Eli Lilly would approach this as a cash/stock mixed deal worth $14.50 per share.

I own no shares in any of the companies listed above and as I mentioned earlier, this is mere speculation.


8 Comments – Post Your Own

#1) On September 17, 2009 at 9:31 PM, Seano67 (24.38) wrote:

Interesting stuff as always, UL. Nice work!

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#2) On September 17, 2009 at 10:17 PM, Tastylunch (28.76) wrote:

heh sorry couldn't resist. :)

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#3) On September 17, 2009 at 10:25 PM, Seano67 (24.38) wrote:

Oh god.....thanks for nuttin you two.  Now I'm gonna have that damn song in me head till next Tuesday at the very earliest! Damn that Minnie Riperton and her piercing shriek!

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#4) On September 17, 2009 at 10:44 PM, binve (< 20) wrote:

LOL! Awesome, thanks man :)

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#5) On September 17, 2009 at 11:30 PM, biotechmgr (< 20) wrote:

An awesome voice, I remember it well. And may she rest in peace (died of cancer in 1979).

She is the mother of Maya Rudolph (SNL comedienne).


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#6) On September 18, 2009 at 8:38 AM, portefeuille (98.32) wrote:

Currently the company has one blockbuster product in Vancocin, ...


FDA panel clears way for generic ViroPharma drug

FDA panel deals blow to ViroPharma drug, recommends reduced testing for generic versions

On Tuesday August 4, 2009, 9:20 pm EDT

WASHINGTON (AP) -- Federal health advisers say generic drug companies should not have to conduct costly human trials before launching generic versions of ViroPharma's lead drug Vancocin, dealing a major setback to the company's gastrointestinal infection treatment.
A Food and Drug Administration panel of experts has voted unanimously, 16 to 0, that generic drug companies can conduct laboratory tests of their drugs instead of more expensive clinical tests, according to a company spokesman. The FDA is not required to follow the advice of its panels, though it usually does.
Vancocin accounts for the vast majority of Viropharma's revenue, which last year totaled $232 million. The drug is the only FDA-approved therapy for antibiotic-associated gastrointestinal infection. The company's only other product is a treatment for acute hereditary angioedema, which causes swelling of the face.
On Tuesday, ViroPharma executives argued that generic drug companies seeking approval to market Vancocin knockoffs should be required to conduct testing in patients with actual gastrointestinal infections. The panel wasn't swayed by that argument, however, and sided with FDA's position that labaratory tests could be used in place of human testing.
The agency is expected to make a final ruling later this year, paving the way for low-cost generic versions of Vancocin from Akorn Inc. and other drugmakers.


ViroPharma Announces Support by Advisory Committee of The Office of Generic Drugs Proposed Guidelines for Developing Generic Versions of Oral Vancomycin Hydorchloride

ViroPharma says not looking to be acquired

How to Play the Viropharma Buyout

ViroPharma at Thomas Weisel Partners Healthcare Conference



#214) On March 15, 2009 at 5:20 PM, portefeuille (99.99) wrote: VPHM - 4.58 - outperform

#614) On July 29, 2009 at 11:23 AM, portefeuille (99.99) wrote: VPHM - end outperform - 8.09 - new rating: market perform


(from here)

VPHM is currently at ca. $8.54.

ViroPharma at Thomas Weisel Partners Healthcare Conference 


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#7) On September 18, 2009 at 8:45 AM, portefeuille (98.32) wrote:

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#8) On September 28, 2009 at 10:37 AM, portefeuille (98.32) wrote:


Viropharma (NASDAQ:VPHM): Upgraded to Outperform at Oppenheimer

Oppenheimer is upgrading Viropharma (NASDAQ:VPHM) to Outperform from Sector Perform with a $13 target.

According to the analyst the upgrade ise based on on a potential surprise for Cinryze revenues and the generic Vancocin overhang being priced into shares. Importantly, 1) investor focus should shift to the continuing Cinryze launch following the development of guidelines for generic Vancocin; 2) Oppenheimer sees minimal downside should Berinert P be approved, as it would likely not impact Cinryze prophylaxis utilization; 3) they believe VPHM shares are pricing in generic Vancocin; and 4) firm is increasing their Cinryze estimates based on penetration in patients currently receiving prophylaxis steroids.

Cinryze launch in focus; revenues could surprise: Oppenheimer believes 2009 Cinryze sales will beat guidance, with revenues surprising as early as 3Q09. In their estimate, VPHM has set an achievable bar to beat guidance. They estimate Cinryze sales of $100M versus consensus of $84M during 2009.

ViroPharma introduced 2009 Cinryze guidance of $80-$95M on the company’s 2Q’09 earnings call, which he firm sees as unimpressive, since low end implies flat 2H’09 sales. They believe 2009 Cinryze sales will beat guidance, with revenues surprising as early as 3Q’09.

Although a generic Vancocin approval would be a near-term negative, they believe investor focus should shift to the continuing Cinryze launch, which could provide significant upside. Based on comments by the company, a greater number of patients being added to Cinryze Solutions are new patients versus those coming from clinical trials. Additionally, the firm notes that approximately 1,500 patients are currently receiving prophylaxis steroid treatment for Hereditary Angioedema (HAE), representing a key switch opportunity for Cinryze given the adverse events associated with steroids.


Vancocin generic overhang priced in: Firm believes VPHM shares currently reflect the launch of generic Vancocin in early 2010. Importantly, they anticipate FDA will issue final guidance and deny VPHM's Citizen Petition near term, leading to potential ANDA approvals in early 2010. However, they expect VPHM to retain ~$50M in annual branded Vancocin sales longer term

Increasing Cinryze estimates, upgrading to Outperform, $13 PT: Oppenheimer's 2009 Cinryze revenue estimate increases to $100M from $88M, and 2010 to $188M from $159M. Our 2009 total revenue estimate increases to $328M from $304M, and 2010 to $211M from $182M. Their 2009 adjusted EPS increases to $1.64 from $1.44, and 2010 to $0.38 from $0.30.



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