Generic drugs are the equivalents of brand-name drugs, typically sold under their generic chemical names at prices below those of their brand-name equivalents. Generic drugs may be manufactured and marketed only if relevant patents on their brand-name equivalents have expired, been challenged or invalidated, or otherwise validly circumvented. Future generic industry growth can be attributed to both a large number of branded drugs losing patent protection in the coming years and a strengthened desire by healthcare payers to increase generic drug utilization. 

The generic industry has seen rapid growth since the mid-1980's. Accompanying this growth has been a growing desire within the industry to challenge the legality of branded drug patents in court, often enabling patents to be overturned years ahead of schedule. Also attributing to the rapid generic growth id the appeal of Healthcare payers, such as large employers like GM and pharmacy benefit managers (PBMs) like Medco Health Systems, to increasingly direct their clients to buy more and more generics. 

The Going Public Transaction Glazer Drug Co. is the fourth largest generic drug company in the world, with annual sales of over $3 billion. It trails only Norvatis AG, Teva Pharmaceutical, and Mylan Labs in sales and profits. Its home office is in St. Louis, with its laboratories and sales outlets in the U.S. and 30 foreign countries, with the largest foreign operations in Great Britain and Australia. 

Its generic brand labels cover medication for heart disease, diabetes, acute infections, and many other ailments. In the fall of 2012, the company decided to go public. Its investment banker was Aaron, Barkley, and Company. Glazer Drug Co.'s most recent 12 month earnings were $150 million with one hundred million shares, providing an EPS figure of $1.50. After conducting a careful analysis of the generic drug industry, the investment banker decided a P/E of 25 would be appropriate, giving the stock a value of 23 CASE Case 23. $37.50. Allowing for the underwriting speed, the net to the corporation and selling stockholders was $36.68. 

The out-of-pocket underwriting expense was $2 million on the 20 million shares that were to be sold to the public. Ten million of the 20 million shares in the IPO were new corporate shares and the remaining 10 million were shares currently owned by Larry Glazer, one of the founders of the company. The 10 million shares sold by Glazer represented 85 percent of his holdings. On the day of the offering, the stock price shot up from $37.50 to $51.10 a share, and by January 1, 2013, the stock had reached a price of $61.75. Since no specific events involving the company had taken place, it appeared that the stock market had a favorable impression of the firm.

1. I am not sure what was the percent underwriting spread?

 2. Subsequent to the issue, by what amount would earnings per share be diluted? 

3.I am having difficulty trying to determine the net proceeds to the corporation from the issue? 

4. What rate of return would the corporation need to earn on the net proceeds to avoid dilution? Note: because of the relatively high P/E of 25, the answer is less than 5 percent. However, the P/E does not figure directly into the calculation. 

5. Using the original earnings per share of $1.50, what would the P/E ratio be based on the stock price of $61.75 on January 1, 2013? 6. I am not sure if Mr. Glazer should be happy about the pricing of the stock by the investment banker and the movement of the stock price after the public offering?

Answer rating: 100% (QA)

1 The underwriting spread is the difference between the price at which the underwriter purchases the shares from the company the purchase price and th... View the full answer