NEW YORK, March 4, 2011 /PRNewswire/ -- 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:
-
http://sec.gov/Archives/edgar/data/1418919/000114420411004807/v209462_ex99-2.htm
-
http://sec.gov/Archives/edgar/data/1418919/000114420411011231/v212771_ex99-1.htm
-
http://sec.gov/Archives/edgar/data/1418919/000114420411011231/v212771_ex99-2.htm
-
http://sec.gov/Archives/edgar/data/1418919/000114420411011227/v212776_ex2.htm
-
http://sec.gov/Archives/edgar/data/1418919/000114420411012496/v213293_ex99-1.htm
SOURCE Mangrove Partners