What CEO doesn’t “feel” his suffering share pricing? Managing share pricing starts outside the office! Adding value entails reducing the perceptions of risk.
History is a great teacher; I remember one CEO who stated his role was to manage the share price and then the company initiatives. He was totally committed with his energy and efforts reflecting this dedication. There wasn’t anyone he did not know or try to be in contact with and he always delivered or explained why and what he could or not do with his platform and strategy. He built confidence by listening and continually evolving his strategy to strengthen his investor base and share price!
So, what is the solution? We all have two ears and one mouth and CEO’s, in particular, need to use them in “proportion” for outreach. Define your own shareholder base, comparables and and peer asset investors; call and measure their input, meet with these investor bases to solicit what will differentiate or position platforms. Build relationships by analyst days or meetings, mini and non-deal road shows, investor letters and direct contact can drive awareness and possibly commitment. A retail broker meeting a day “might” drive volume and replace the aspirin needed for a depreciated share price.
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Unfortunately, many small cap healthcare companies have over-exposure to warrants, options and preferred stock of past toxic financings that are baggage still burdening their viability, stock pricing and needed future financings.
Valuing some capitalizations or “market caps” assumes a comparables or peer estimate of a company’s value versus – perceived – future prospects. Calculated as the number of shares outstanding (as opposed to authorized) times the price per share; however, market capitalization should – NOT – be confused with the – FAIR – market value of these companies since the pricing is unduly influenced by outstanding warrants, options and preferred financings plus issued shares equating a fully diluted number.
Warrants entitle the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue. Warrants are – TOO – frequently attached to PIPE and preferred financings as “sweeteners” incentives which are usually detachable and can be sold independently of the stock (which may help or hurt a company depending on share performance). While, preferred shares or preference shares, typically have a higher ranking than common stock (with or without voting rights); these usually can be converted into common stock, but – WHY – in this challenged economy. However, preferred(s) carry – priority – over common stock in the payment (sometimes stock) as preferred(s) can also be – paid out – in an asset sale before common stockholders and after debt holders in bankruptcy (the newest reality). While options are awarded to management, directors, employees and consultants in companies to “reward” performance; they often become a burden and a questionable obligation.
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How do we define the differences between justified risks and irresponsibility? Boards of Directors (BODs) have responsibilities but, are they exercising their proper fiduciary role in monitoring enterprise development, risk definition and shareholder interests?
The financial crisis has heightened the issues of sustainability. BODs of small cap companies are now subject to even more risks associated with their industry, development stage, financial structure, business model and operating history. Early stage healthcare company’s ability to continue operating depend on successfully develop technologies for human applications which could have limited human applications as they struggle to survive regulatory constraints, clinical trials and burn-rates. Almost all companies require substantial funds usually with multiple rounds to continue operating which may – NOT – be available and if they are … on – WHAT – terms. How much debt, losses and negative cash flows from operations and substantial stockholders’ deficits should be sustain until a timely or proper decision to elect strategic options is realized?
Understanding priorities of time and participation for BODs; shouldn’t emphasis be put upon applying – TOOLS – for outcome scenarios, risks as well as probabilities analysis that are focused to present conditions, comparable/peer analysis and future trends layered against upside and negative implications to define – the decisions of a going forward or an asset sale. BODs should protect themselves with the right – TOOLS – to define and validate, measure and update their on-going participation? Unfortunately, oversight usually lacks incentive for many BODs to spend the requisite time validating operational initiatives and their inherent risk.
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The ongoing economic crisis had made bankruptcies; one of the newest “EXIT” strategies for many emerging small cap healthcare companies.
The companies most at risk have less than 6 months of cash and usually no “definitive” clinical data in the near future. It has been stated that 25% of emerging small cap healthcare companies (usually biotechs) fall into this category of teetering on the edge. Is one of the issues the plethora of “me to” platforms? Many CEO’s are still married to the big “IF” – access to capital as they teeter on the brink of bankruptcy, go into hibernation, cut staff and development programs to preserve cash. The financial crisis is making bankruptcy more likely as – NO – source of capital or lifeline is available to bail them out. The past historical model WAS being acquired or entering into an asset licensing but in this economy M&A and “strategic options” have passed them by … as they waited – TOO LONG!
Referencing cash raising, “The amount raised this year by (biotechnology) companies fell by $9.7B through 9/09, or 54%, compared with the same period in 2007. Financing fell to $8.2B through9/09, from $17.9B last year. Venture capital funding fell 16 percent, to $2.9B” (Bloomberg)
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Blogging is reshaping the web impacting the dissemination of new conviction ideas. It is shaking up markets and journalism enabling millions of people to have a voice and connect with others. I blog to add commentary, update news flow and insightful opinions that are intelligent, fit – to print and SEC – compliant. Wall Street has dramatically slashed its ranks of analysts providing research but, scientific platforms and industry sectors need to be better researched for conviction ideas. As an industry veteran, I am continually mortified about the gross inaccuracies of message boards that deal with fiction, inaccurate prognostications and rants. The role of my internet blogging, I believe increases transparency.
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Biopure – the Cambridge based biotechnology company – founded in 1984 (NASDAQ: BPUR) filed for Chapter 11 (7/16/09). Biopure developed pharmaceuticals, called oxygen therapeutics, that are intravenously administered to deliver oxygen to the body’s tissues. BPUR failed amid numerous regulatory setbacks – and should have known – then – there are no magic acts in this business! BPUR has now entered into an agreement with OPK Biotech LLC for the sale of all of its assets. Note, if the proposed OPK Biotech LLC transaction closes (as stated) there will be limited, if any, value for the common stockholders in the bankruptcy liquidation process – the filing lists total assets of $5.06 M and total debts of $2.72 M.
The writing has been on the wall for the past number years. In fiscal 2008 (from filings) financing activities provided $16.4 M in cash, from the sale of common stock and warrants; 10/31/08, BPUR had $1,095,000 in cash and cash equivalents. On 10/22/08, BPUR (then $0.28) had received notice from NASDAQ indicating granting of an extension to regain compliance. At 12/31/08, it had $356,000 in cash and cash equivalents – not sufficient enough to pay its current obligations.
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I was left scratching my head about yet another recent biotechnology Chapter 11 bankruptcy or should I have been? Company “X” had 2 FDA approved products, revenues, a traction able market with a sales force. As one of – many – who have sought protection; should “X” be considered just … bad luck in bad times …? They “seemed” to have been “more than a glass half full” as compared to many public healthcare small-caps – especially by having a “been there and seen it before” board. I shouldn’t say I am surprised, I have seen it before – however, the ability to cut costs and execute new directions involves another set of skills.
I have been reviewing all filings and message boards for my (own) after-action report. Many of us need to play closer attention to releases and filings – Q’s and K’s – specifically late ones, strategic options statements, accountant statements re on-going concern, NASDAQ de-listing filings as well as investor rotations! Key statistics must be scrutinized but do not always provide the appropriate measurement – it didn’t for me! The legitimacy of message boards was totally unrealistic as I reviewed perception.
Investment decision-making must – return to basics – as small-cap healthcare investors with some or no access to I-Bank research need timely intelligence and diligence updates. My spread sheet was just enhanced by 7 lines. Investors are more afraid of being left with empty pockets than being left behind in any market rally. But, what … else … lurks in the recesses of many small-cap healthcare companies? In this tough market; the value of real-time intelligence has become more important in providing an investor advantage. One quick observation, strategic option press releases shouldn’t invite an investor initiative other than exit.
Private investment in public entity (PIPE) healthcare related financing are still happening … very slowly but are not dead. The instability that has rocked the investment banking industry over the past two years has maintained the “sweet spot” for the existing PIPE firms. Over the past six (6) months, 251 (215 registered PIPES and 36 described as offerings) transactions included 161 closings and 90 filed with approximately 145 geographically encompassing the US and Canada while the EU had 31, Asia-Pacific 72 and 3 in Africa/Middle East. Rodman & Renshaw, LLC has maintained its leading position in PIPE transaction deal volume during Q1-2/09. Rodman & Renshaw completed 29 transactions raising a total of $420.6M across a broad platform of technologies in Q1-2/09.
The most active healthcare buyers have been: Yorkville Advisors LLC (3), Bay City Capital LLC (2), BioTech Capital Limited (ASX:BTC) (2), Majedie Asset Management Limited (2), New Enterprise Associates (2), Titan Bioventures Management Pty Ltd (2), Venrock (2), Vicis Capital (2), LLC, Accelmed Fund (1) and Al Rajhi Holdings W.L.L (1). Interesting alternative financing sources included Duchess Capital Management, LLC , Alta Partners, Nextech Venture Ltd, LFB Biotechnologies S.A.S.U. and Victoria Squares Ventures, Inc (Source: Capital IQ).
Another lightly used vehicle, rights offering are few due to share pricing constraints and are defined as offerings of common stock to investors who currently hold shares which entitle them to buy subsequent issues at a discount from the offering price included: Generex (GNBT), Pharmacyclics (PCYC), MigenixI (TSX: MGI; OTC: MGIFF).
Gloom still pervades the market.
This is the time to redouble and triple investor outreach. The economy seems to have made a bottom and the consensus is the worst is behind us. Yet, many companies think that pulling back not pushing out is the way forward. In this market, it is all about relationships! With the disappearance of many brokerage firms and analysts, it is even more crucial to develop external investor access.
Start by defining a constituency of investors, asset managers, high-net worth individuals, institutional and retail brokers that might listen. Who are your peers or comparable investors? Call them or have someone knowledgeable call them. Aside from generating interest in your stock; calls or meetings with investors provide you with the opportunity to fine tune your pitch … i.e. investing thesis into an actionable value proposition.
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Hedge funds, money managers and private equity firms which had been the new homes of departing analysts have been hammered by depreciation, redemptions, closures and mass investor exits leaving many escapees from the investment and research side left by the side of the road.
Money managers have also experienced multiple rounds of job losses but, redemptions have slowed. Capital Group had multiple rounds of cuts and pay freezes; Fidelity has cut their staff with Franklin Templeton, MFS, BlackRock, Alliance-Bernstein, State Street, LeggMason, Janus, Pimco, Boston Company Asset Management, Putnam and many, many more also reduced staff. Close to 1500 hedge funds (15%+) closed in the past year. But, hedge funds are coming back but slowly and are on course to complete their best start to the year since 1999 that might restore investors’ faith in them and other parts of the financial services industry continue to show moderate signs of revival. The WSJ states; hedge funds made an estimated 9.73% in returns for the year to June 24.
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