Mangrove Partners, owners of 149,373 shares representing approximately 5.71% of the outstanding shares of CPEX Pharmaceuticals, Inc (Nasdaq: CPEX), believes its analysis and intentions were inaccurately portrayed in CPEX’s March 2, 2011 letter to stockholders, which appears to use scare tactics in order to pressure stockholders into accepting an inadequate price for their shares.
Commenting on the merger, Nathaniel August replied, “At its most basic level the merger makes no sense. The buyer is funding only $3 million of equity yet there is approximately $10 million in transaction fees being paid to management and advisors.”
As regards CPEX’s scare tactics, Nathaniel August remarked, “When we first purchased CPEX stock last April, management told us the outlook for Testim was wonderful following the FDA’s response to Auxilium Laboratories, Inc.’s Citizen’s Petition, which states that future generic competitors must file a full NDA. Now that management is about to capture their change of control payments, CPEX is only too willing to tell stockholders how awful the outlook is for Testim.”
Mangrove Partners would like to highlight the following inaccuracies in CPEX’s letter:
- CPEX’s letter fails to inform stockholders of the Citizen’s Petition regarding generic versions of Testim (and a subsequent affirmation of that response), which requires potential competitors to file a full NDA, an extremely costly process, in order to be approved.
- Competing and generic products have been well known since before CPEX issued its proxy statement, which forecasts continued growth in the Testim royalty over the next four years despite the new competition. Is CPEX backing away from this projection? Although our analysis suggests that Testim is often used after AndroGel® has been ineffective, in which case we see little threat to the existing user base, we used CPEX’s own projections in the proxy statement showing slower future revenue growth as compared to the historic rate. Even with this slowdown, we show the DCF value of CPEX using the proxy statement’s projections far exceeds the merger price.
- CPEX claims we don’t account for legal costs of maintaining the patents, but the truth is we use the proxy statement’s projected G&A expenses. On page 36 of the Company’s most recent 10-K legal costs are clearly included in G&A. Is CPEX now saying management’s figures were wrong?
- CPEX claims we make dividend projections for future years, but the truth is we just show potential 2011 dividends based on CPEX’s projections in its proxy statement. If CPEX thinks the proxy statement is correct, then the dividend will actually grow for the next 3-4 years. Many royalty trusts we use as comparables already have declining production yet trade at 7-8% yields.
We are frustrated that CPEX seems to simply disavow their own figures in an effort to scare stockholders into accepting an offer that undervalues CPEX but provides management with lucrative change of control payments and its advisors with substantial fees.
Mangrove Partners believes there are two questions in evaluating the merger. First, is this a fair price? CPEX’s advisors use a DCF valuation and Mangrove Partners used CPEX’s own projections from the proxy statement to show that a DCF valuation far exceeds the $27.25 per share offered in the merger. CPEX has failed to show or even assert that our DCF analysis contains any errors. Second, is there a better alternative to the merger? Mangrove Partners has suggested either creating a royalty trust or refocusing on dividends. CPEX has failed to show any errors with our analysis showing that CPEX could pay an $8-9 per share annual dividend as a royalty trust or an $8-10 per share special dividend and a $4-5 per share annual dividend as a standalone company. Mangrove Partners stands behind its analysis, all of which is based on management’s projections in the proxy statement.
Mangrove Partners did have several discussions with CPEX’s advisors, but it was denied access to management and to the elected stockholder’s representatives of CPEX, the Board. In our discussions, we never made an offer to purchase CPEX and we currently have no intention of making such an offer. CPEX’s advisors conditioned a management call on agreeing to onerous confidentiality restrictions and limiting discussion to written questions submitted in advance. The simple truth is that the Board and management have refused to have any dialogue with us and have never returned our calls. What is so scary about a conversation with one of your stockholders?
Mangrove Partners was further confused by CPEX’s assertion that voting down the merger is “Mangrove’s only path to a profitable investment.” Had the Board read our filings, they would know that we have made money on our investment in CPEX. At this point, Mangrove Partners only cares about maximizing value and our future per share returns will replicate the returns earned by all other stockholders. In fact, publicizing our opposition to the transaction comes at our sole expense, yet a better outcome will be shared by all stockholders. This is the opposite outcome of the merger, which has management receiving large change of control payments while stockholders are denied better alternatives such as a royalty trust, dividend focused company, or dividend recapitalization. Our interests are aligned with fellow stockholders.
Instead of addressing stockholders’ concerns, CPEX has derided Mangrove Partners for its investment in CPEX. We understand the sale process was time consuming and the Board is recommending the merger, but that does not excuse CPEX’s unwillingness to engage with shareholders. We strongly encourage the Board and management to open a two-way dialogue with their stockholders and question why Robert Hebert was listed as the investor contact on CPEX’s press release when to the best of our knowledge he has not returned shareholder calls for months.
Mangrove Partners opposes the proposed merger based on the following factors:
- Inadequate Price: The merger represents only 3.6x 2011 forecast operating profit and is a discount to the debt being raised by the acquirer. The inadequate price was further revealed when the acquirer’s stock more than doubled after announcing it will acquire CPEX.
- Better Alternatives: CPEX can refocus itself on paying its earnings out can afford a dividend of over $4 per share without touching its estimated net cash position of over $9 per share. Alternatively, CPEX may be able to spinoff Testim into a royalty trust paying over $8 per share in annual dividends. We believe CPEX is worth substantially more as a standalone company than the merger consideration being offered.
- Conflicted Management: Management is set to receive change of control payments of over $7.3 million or over 10% of the value of CPEX.
- Faulty Fairness Opinion: The fairness opinion is lacking key elements such as comparable transactions and comparable companies analyses. The DCF analysis provided to stockholders appears misguided and we could not replicate its conclusions using the banker’s methodology.
Investors with questions concerning our reasons for voting against the merger should call Steven C. Balet or Geoff Sorbello at Okapi Partners LLC, which is advising Mangrove Partners, toll free at 1-877-285-5990.
Mangrove Partners’ prior letters and presentations to CPEX can be found here:
CONTACT: Steven C. Balet or Geoff Sorbello, both of Okapi Partners LLC, for Mangrove Partners, 1-877-285-5990
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