While we have started mostly using The Wire at 247wallst.com for our biotech and active trader posts (among many other aspects 50 to 100 times per day), we have a question for BioHealthInvestor readers after VIVUS, Inc. (NASDAQ: VVUS) has basically doubled on news of Qnexa getting a recommendation for approval from a FDA panel…
If you were the CEO or CFO of VIVUS, wouldn’t you immediately go out and raise capital now?
Our take is not just “yes” but a resounding yes. With $150 million or so in net tangible assets as of September 30, 2011, with a ten-year history, and for many more reasons, this would seem like a shoe-in for a capital raise.
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COMPLETE GENOMICS, INC. (NASDAQ: GNOM) has filed to raise up to $75 million in cash in a public stock offering. The filing is for 4.5 million shares, or it would be 5.175 million shares if the overallotment is exercised. The book-runners are Jefferies and UBS Investment Bank, and co-managers are Baird and Cowen & Co.
Based upon the company’s name, you already figured out that they are in the genomics business. It has a DNA sequencing platform and its goal is to “become the preferred solution for complete human genome sequencing and analysis” via its proprietary Complete Genomics Analysis Platform. This allows academic and biopharmaceutical researchers a quality, cost-efficient and scale-efficient platform without having to invest in the expensive in-house sequencing instruments and equipment and personnel. Its service launched in May 2010, it has sequenced over 1,400 complete human genomes, and its count was over 600 in the first quarter of 2011. At March 31, 2011, it claimed an order backlog of over 2,000 genomes.
The use of proceeds (approximately $62.0 million) is as follows:
- Approximately $20.0 million will go for capital expenditures to expand the sequencing and computing capacity in its Mountain View and Santa Clara leased facilities;
- Approximately $15.0 million to finance the further development of its sequencing technology and services;
- Approximately $15.0 million for sales and marketing activities;
- The remainder of cash will be for working capital and other general corporate purposes.
The company stated in its IPO filing, “Our goal is to be the first company to sequence and analyze high-quality complete human genomes, at scale, for a total cost of under $1,000 per genome.”
The present facility has the capacity to sequence and analyze over 400 complete human genomes per month, and the company seeks to a capacity boost of between two- and three-fold by the end of 2011 as it deploys additional sequencers and increases the throughput its sequencing process through software refinements and component upgrades.
The company just reported earnings yesterday and showed to have revenues of $6.8 million for the first quarter. That compares to about $0.3 million in the first quarter. Operating expenses were $18.9 million, up from $14.6 million a year earlier. The company said that it believes its backlog will be worth some $15 million over the next twelve months. Pricing of genome services starts at $9,500 per genome for small order sizes to between $5,000 to $7,500 per genome for orders in the hundreds of genomes.
Complete Genomics ended the quarter with $68.8 million in cash, which reflects the completion of a $20 million loan agreement with Oxford Finance Corporation. $7.4 million of the Oxford loan was used to repay the balance of an existing loan with Comerica.
The market cap before the effects of this offering was listed as $364 million. The stock has less than a year of trading and its range has been $6.60 to $17.25 and the average daily volume is 150,000 shares.
JON C. OGG
This last week brought an interesting move in shares of Prana Biotechnology Ltd. (NASDAQ: PRAN). On Friday we gave this coverage right at the open noting at 24/7 Wall Street that the stock was still worth a look for speculators despite a news pop followed by a capital raise that hurt the stock’s gain during the week. This ADR is of a company based in Australia and its focus is Alzheimer’s, Parkinson’s, and Huntingston’s Diseases. It is highly speculative by any measurement. Prana effectively has no revenues and our take is that it will be highly reliant upon grants from governments, agencies, and other foundations and organizations or it will have to rely upon the capital markets or a partnership for more funding down the road.
The company saw shares surge earlier in the week on reports that data was being published in the science journal PLoS ONE with the title “Metal Ionophore Treatment Restores Dendritic Spine Density and Synaptic Protein Levels in a Mouse Model of Alzheimer’s Disease.” Its PBT2 was shown to have repaired damage in an Alzheimer’s affected brain and that facilitated the restoration of cognition in Alzheimer’s Disease.
Then came news from the company that it was raising capital in Australia to the tune of $6.1 million (Australian Dollars), a move which investors often consider as pump and dump capital raises. What is interesting though is that right after we published “Still Worth a Look for Speculators” we saw an immediate 10% rise in the stock. Shares went from $2.78 or so up to $3.10 in very short order and then the stock rose again in a second leg up to as high as $3.34 before closing at $2.86 for a near three percent gain on the day.
Prana ADRs were under $1.50 before it published the news on Monday and shares closed at $2.86 on Friday, nearly a double for the week. We also saw shares hit a high of $4.50 on Tuesday and that was on a whopping 36.4 million shares that day. This was previously unheard of trading volume in a single day and there are many days where the stock has traded only a few thousand shares. The 52-week range is $1.09 to $4.50 and this stock once traded above $6.00 per ADR back in 2004 or 2005.
We would note that StockCharts.com offers a full gallery review for the charts on Prana, and its Point & Figure price target objective is all the way up at $7.50. That figure will change through time and was based upon March 25 prices and volume.
So, even at the low of $1.09, you may wonder why we call Prana an opportunity for a ten-bagger with that implied upside of 1,000%. Shares have never traded above $10.00 for its ADRs and technically this stock would have to rise to well above $11.00 before we could legitimately call this a ten-bagger. The whole issue surrounding the stock is that even at $2.86 the company’s market cap is a mere $69.2 million before considering the effects of its capital raise. For these ADRs to rise this high in ten-bagger land it would imply a market capitalization rate of what is still only about $266 million.
We believe that the company will continue to need more funds ahead in the coming months and years and it seems logical that the company will raise capital each time its shares rise significantly. There is no way to know yet whether PBT2 is going to be the Holy Grail or whether it will be yet another disappointing flash in the pan. The company noted, “After 11 days of treatment, the brains of the Alzheimer’s mice showed a statistically significant increase in the numbers of spines on the branches (or dendrites) of neurons in the hippocampus, a memory centre specifically affected in Alzheimer’s Disease.”
What we do know is simple. If it turns out that Prana has the next new real treatment candidate for Alzheimer’s, even a $266 million market cap will sound very small. It could quite literally end up being an “Off To The Races” scenario for investors. A Big Pharma company could either become an acquirer or it could become a partnership opportunity. Again, this is all around speculative analysis rather than using true fundamental and financial analysis based solely on today’s finances. There are no real US firms which cover Prana so we have no real benchmark to judge what could happen in just a bullish scenario rather than a runaway scenario. The company has a single research report posted on its site from 2009 by Southern Cross Equities and it is very bullish with a title “Unforgettable Opportunity” from that time.
Looking at potential ten-baggers is not for widows and orphans. After all, we are talking about study results conducted on mice and on a company which will need significant funding ahead by our count. A large partnership or other liquidity event from a Big Pharma player could also bring rewards and also bring risks down the road. Many companies rise on news and end up in a flame-out situation. All of the magic characteristics are in place for a possible ten-bagger scenario, and all of the risks are in place as well. Time will be the judge as to whether or not Prana will end up being he next ten-bagger in biohealth.
Here is that data published in PLoS ONE.
JON C. OGG
Cell Therapeutics, Inc. (NASDAQ: CTIC) is one that many will have forgotten about or one that many wish they had forgotten about. Now the company is in the news after announcing a securities purchase agreement to sell securities in a registered offering to a single life sciences institutional investor.
The company said that it may use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, technologies or products. Cell Therapeutics noted here that it has recently engaged in limited discussions with third parties regarding such investments or acquisitions, but has no current agreements or commitments with respect to any investment or acquisition. It may also use the proceeds for general corporate purposes, such as paying interest on and/or retiring portions of its outstanding debt, funding research and development, preclinical and clinical trials, the preparation and filing of new drug applications and general working capital.
This sale is listed as being for “up to approximately $25.0 million of shares of its Series 10 Non-Convertible Preferred Stock,” warrants to purchase up to approximately 25.9 million shares of common stock and an additional investment right to purchase up to approximately $25 million of shares of its Series 11 Convertible Preferred Stock. Details are as follows:
- The shares of Series 10 Preferred Stock will accrue annual dividends at the rate of 10% from the date of issuance, payable in the form of additional shares of Series 10 Preferred Stock. The shares of Series 10 Preferred Stock are redeemable at the option of the Company at any time after issuance, in whole or in part, either in cash or by offset against recourse notes fully secured with marketable securities, which may be issued by the Investor to the Company (the “Notes”) in connection with the exercise of the Warrants and the Additional Investment Right.
- The Warrants have an exercise price of $0.337 per share of common stock. The Warrants are exercisable immediately and expire two years from the date of the Purchase Agreement. The exercise price of the Warrants may be paid in cash or by the issuance of Notes. The Warrants are subject to cancellation and mandatory exercise under certain conditions, in whole or in part. The total potential additional proceeds to the Company upon exercise of the Warrants for cash are approximately $8.7 million.
- The Additional Investment Right has an exercise price of $1,000 per share of Series 11 Preferred Stock. The Additional Investment Right is exercisable immediately and must be exercised no later than March 19, 2011. The exercise price of the Additional Investment Right may be paid in cash or through the issuance of Notes. The Additional Investment Right is subject to cancellation under certain conditions, in whole or in part. The total potential additional proceeds to the Company upon exercise of the Additional Investment Right for cash are approximately $25.0 million.
- Each share of Series 11 Preferred Stock is convertible at the option of the holder, at any time during its existence, into approximately 2,967 shares of common stock at a conversion price of $0.337 per share of common stock, for a total of approximately 74.1 million shares of common stock.
- The closing of the issuance and sale of the Series 10 Preferred Stock is expected to occur on the 10th trading day following the date of the Purchase Agreement, subject to certain closing conditions. Additional details regarding the offering can be found in the prospectus supplement relating to the offering to be filed with the Securities and Exchange Commission (the “SEC”) on February 18, 2011.
JON C. OGG