Cambrex (CBM) is a specialty pharma company with a strong niche API business and in 2008 is on track to do $27m in EBIT and $50m in EBITDA. At a $312m EV, Cambrex is trading at 11.6x EV/EBIT and 6.2x EV/EBITDA on 2008 numbers, and 5.6X our ’09 EBITDA estimate.  For a number of reasons detailed below, we see it as likely that the business will be sold within the next year, and an acquirer could easily take out $10m in corporate overhead (from discussions with Cambrex management), putting the company at significantly lower effective multiples for an industry buyer.  The underlying business, selling active pharmaceutical ingredients (“APIs”) for niche generics and branded drugs, is in good shape and concerns about competition from China and India are overblown.

 

FD Shares – 29.5m

Price - $8.20

Market Cap - $242m

Cash - $45m

Cash outflows in 2008q1 - $18m – (see 2007q3 conference call)

Debt - $97m

Net debt - $71m

EV - $312m

 

Up through late 2006, Cambrex had three business segments: Bioproducts, Biopharma (collectively, “Bio”), and Human Health.  Bio was sold to Lonza, a European strategic player, for $460 million in October 2006.  The remaining Human Health segment can be broken down in two ways:

 

By function:

Custom development – Contract outsourcing of drug development for pharma companies.  Currently, 50 projects underway, 15 projects in Phase III clinical trials.

Custom manufacturing / Proprietary technologies – Long-term contracts (7-10 years) to produce branded APIs for pharma companies.    Focus on oncologics (cancer drugs), DEA controlled substances, and development of in-house intellectual property through R&D.

Generics – Contract manufacturing of generic APIs for pharma companies.  Short-term contracts, higher-margin.  They aim at niche APIs – 66% are sub-$5 million market drugs.  A favorable dynamic exists here because of duel-sourcing requirements.

Other - Non-core legacy business – Manufacture of feed additives and specialty chemicals

 

By product:

APIs – Active ingredients in drugs.  Manufacture both Branded and Generics.

Pharmaceutical Intermediates – Inputs into APIs.

Other – Non-core legacy business - mainly feed additives and specialty chemicals

 

The company has three main plants: Milan, Italy focusing on generic APIs; Karlskoga, Sweden, focusing on branded APIs; and Charles City, Iowa, focusing on custom development work, controlled substances, oncologics, developing proprietary drug-delivery IP, and the legacy fine chemical business.  Up until 2005, the company was mostly focused on Bio and did not invest much in the Human Health plants.  The company is now in the middle of an upgrade cycle which should end in early 2009 with all three plants in excellent shape.  The company invested $25m to upgrade Italy from 2005-2007, is investing $20m to upgrade Sweden from 2007-2009, and is investing $4m in Iowa in 2008.  Capex should fall to $32.5m in 2008 and then down to a $22m in 2009 and beyond.  The Italy facility is very high quality and operates more or less as a standalone unit and is an attractive and saleable asset.

 

Management is optimistic about business, guiding to mid-single digits revenue growth over the next few years.  This will be driven by development of proprietary technologies, a strong pipeline in custom development, and tailwinds in generics due to regulatory change in Europe and Medicare changes in the U.S.  The market seems to be very worried specifically about competition on the generic side, but we believe this business is solid.  For Cambrex, 66% of the generic business is aimed at niche drugs with under $5m of sales (for the API, not the final drug.  API is about 5% of final drug selling price).  For contracts this small, the switching costs for drug manufacturers outweigh the benefits. 

Corporate overhead has been cut to a run rate of $17.5m in 2007 q4, and management expects $16m in 2008.

 

In the fall of 2005, Cambrex decided to reverse its strategic plan to move more heavily into the Bio business and engaged Bear Stearns in order to break up the company.  The board recognized that each segment was sub-scale to run as an independent concern.  They looked to sell the Bio business to a strategic buyer, the Human Health business to a financial buyer, or the whole company to the highest bidder. As part of this process, , the CEO, David Leone, who had come aboard in mid-2004 to lead an expansion of Bio, stepped down and James Mack, the previous CEO from 1990-2004, stepped back in as the acting CEO.

 

Throughout 2006, Cambrex engaged in an attempted auction of both Bio and Human Health, with limited interest in the latter (only one bidder showed much interest).  Lonza, a European strategic player, won the Bio bidding in October 2006 for $460 million.  Cambrex decided to retain Human Health and try to increase profitability through cost cutting, specifically corporate overhead, while still looking to sell.  In addition, the company sold two old and unprofitable Human Health facilities in Cork, Ireland (“Cork”) and Landen, Belgium (“Landen”), avoiding shutdown costs of roughly $20 million.

 

It seems likely that the remaining business will be sold within the next year for the following reasons:

1) James Mack, the formerly-retired-and-current CEO wants to retire again and has stated he will step down within the next 12 months.  He gets a $1.5 million cash bonus if he “achieves further strategic alternative goals”.

2) Cambrex is the only pure-play API producer in the U.S. and the board’s rationale for trying to sell the company in late 2006 still holds (too small to justify operating as a standalone).  Management estimates a strategic acquirer could take out $10 million of costs vs. 2008 corporate overhead of $17 million.

3) The three main factors scaring away bidders in 2006 have all been settled – a) a $100m headline-value lawsuit over the sale of the company’s former Rutherford Chemicals division, b) the sale of the money-losing legacy Cork & Landen facilities and elimination of the associated $20m in shutdown costs and c) the presence of the money-losing Biopharma business.

4) A number of rising Indian players could use the established U.S. presence.  Jubilant Organosys & Nicholas Piramal, specifically, are expanding in the API segment and both have expressed interest in buying Cambrex in the past.

 

Management as stated that they are going to revisit the sale decision in early-to-mid 2008, and at that point either sell or hire a new CEO and continue as a standalone.

 

Clean comparable transaction data is hard to come by, as there are few players who do exactly what Cambrex does, and many acquisitions involve divisions of larger companies with limited reporting.   The closest comp is Groupe Novasep , bought in an LBO at  8x TTM EBITDA ($553m) in 2006, and discussions with players in the industry indicate that a transaction would likely take place around that range.

 

Currently, Cambrex makes a good deal of money in Italy and Sweden and loses money in the U.S.  This leads to a very high effective tax rate.  The company had built up a large tax asset which it utilized almost completely in the Bio sale.  Currently, the company pays roughly 40% tax in Italy and 28% tax rate in Sweden.  This is another reason for either a sale or acquisitions in the U.S., as the current setup is tax inefficient.