Scimitar Equity Blog

Referencing our multiple financing structure posts re PIPEs and RDOs; a new survey identifies key drivers of private investment in public equities in “next” 12-18 months. The survey conducted in Q3/09, canvassed the opinions of experienced PIPE investors, private equity practitioners, venture capital investors, hedge fund managers and mutual fund investors. (Source:  mergermarket in conjunction with Kramer Levin Naftalis & Frankel LLP and Rodman & Renshaw LLC)

• 49% – of respondents “expect” to see an increase in their firm’s PIPE investment activity over the next 12 to 18 months,
• 43%  – “expect” their firm’s activity to remain at its current level,
• 82% – of respondents “expect” to see an increase in the volume of registered direct offerings (RDOs) due to their uniquely appealing features for issuers,
• 82% - of respondents “expect” the lower mid-market range to offer the highest volume of PIPE opportunities,
• 54% – of respondents “expect” to see the greatest demand for PIPEs in the Healthcare, Biotechnology and Life Sciences industry.

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After months of suspending requirements that stocks stay above $1, NASDAQ is cracking down. On 8/3/09, NASDAQ reinstituted the rule, saying stocks that don’t trade above $1 for 30 consecutive days will begin the delisting process.

Stocks (51) potentially in danger of being delisted:  EnteroMedics (ETRM), Catalyst Pharmaceutical Partners (CPRX), United American Healthcare (UAHC), Nucryst Pharmaceuticals  (NCST), ICAgen (ICGN), Bioanalytical Systems (BASI), Neurobiological Technologies (NTII), Star Scientific (STSI), Ocean Bio-Chem (OBCI), Cyclacel Pharmaceuticals (CYCC), EpiCept Corporation (EPCT), AP Pharma (APPA), Orthologic (CAPS), Nyer Medical Group (NYER), Telik (TELK), GenVec (GNVC), Repros Therapeutics (RPRX), GeoPharma (GORX), XOMA (XOMA), Insmed  (INSM), Dynatronics (DYNT), Marshall Edwards (MSHL), Aastrom BioSciences (ASTM), Advanta Corp (ADVNB), Altus Pharmaceuticals (ALTV), Amarin (AMRM), Bionova (BNVI), Cardica (CRDC), Cell Genesys (CEGE), Commonwealth Biotechnologies (CBTE), Convera (CNVA), Dara Biosciences (DARA), DeCode Genetics (DCGN), Endologix (ELGX), Forbes Med-Tech (FMTI), Generex (GNBT), Genetics Technology (GENE), GTC Biotherapeutics (GTCB),  Hollis-Eden Pharmaceuticals (HEPH), Hythium (HYTM), Metabasis Therapeutics (MBRX), Neurogen (NRGN), NexMed (NEXM), Ore Pharmaceuticals (ORXE), Peregrine Pharma (PPHM), Progen Pharmaceuticals (PGLA), Targeted Genetics (TGEN), Thermogenisis (KOOL), Urologix (VLGX), Vasogen (VSGN) and Via Pharmaceuticals (VIAP). (Source: NASDAQ)

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Referencing our previous post,  “The Need to Continue Funding for Cancer Compounds” about cancer drugs in development … President Barack Obama recently announced a plan to spend $5 B on medical and scientific research, medical supplies and upgrading laboratory capacity.

The funds, to come from the $787 B economic stimulus package will “pay” for cutting-edge medical research in every state across America. Could we assume that the word ”pay” might equate to “investment”? $1 B will go to research into the genetic causes of cancer and potential targeted treatments. Obama also promised a large infusion of funds into research on autism, which affects an estimated 1 in 150 U.S. children. “This kind of investment will also lead to new jobs: tens of thousands of jobs conducting research, manufacturing and supplying medical equipment, and building and modernizing laboratories and research facilities,” Obama said in a speech at the National Institutes of Health outside Washington. The more than 12,000 grant awards are part of an overall $100 B Recovery Act investment. (Reuters)

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A recent MassBio report found the number of biotechs in the state increased to about 400 over the past 7 years and the number of employees increased from 30,000 to 40,000.  But the report also warned that 1/2 of the state’s publicly traded biotechs are in danger of running out of cash before the end of the year.

The effects of this current economic climate has put increased pressure on pharmaceutical companies to contain their costs; but this need has not just “arisen” from the recession as patent expirations, lack of late stage products,  slimmer development pipelines, pricing pressures and tougher regulatory environments affect all.  Current acquisition activities tend to be “storied” mergers to economic efficiencies, market focus and cost containment.

Venture capital (VC) investment was down 44% in the first half of 2009.  The past boom attracted huge amounts of money but the present bust has changed the fundamentals of venture investment.  Today, few can invest in new companies as there isn’t enough in the coffers for portfolio companies with IPOs non-existent and acquisition exits miniscule.  VCs are having their own financing problems with their own inability to raise new funds.  Hedge funds which frequently played in the crossover investment space as a source of funding have also retreated to the basics as their ranks have been depopulated and returns have been miniscule as related to this sector.

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Pharmaceutical researchers are now working on 861 medicines for cancer. Many are are in development  involving innovative research on using existing medicines in new ways with many clinical trials proceeding .

The medicines in development—all in either clinical trials or under FDA review including: 122 for lung cancer, the leading cause of cancer death in the United States; 106 for breast cancer, which is expected to strike more than 180,000 American women each year; 103 for prostate cancer, which is expected to kill more than 28,000 American men each year; and 70 for colorectal cancer, the third most common cancer in both men and women in this country. Additional medicines target brain cancer, kidney cancer, leukemia, ovarian cancer, pancreatic cancer, skin cancer, and others. (Source PhRMA).

Bottom-Line: Despite progress, cancer remains the second leading cause of death by disease in the United States, exceeded only by heart disease. In 2008, some 565,650 Americans were expected to die of cancer—more than 1,500 people a day. Obama has made healthcare a top concern on his agenda as part of this year’s economic stimulus package with the federal government increasing funding to the National Institutes of Health by $10 B.

Covidien, plc, a Dublin, Ireland medical device and pharmaceutical maker but with its U.S. headquarters in Mansfield, Mass. announced an agreement to acquire Aspect Medical Systems (ASPM) of Norwood, Mass. Covidien will pay $12.00 in cash per Aspect share for a total of approximately $210 M, net of cash and short-term investments acquired. The transaction, which will take the form of an all cash tender offer followed by a second-step merger is subject to customary closing conditions, including receipt of certain regulatory approvals and is expected to be completed by the end of calendar 2009 (Business Wire).

Founded in 1987, Aspect has been recognized as a pioneer and global market leader in brain monitoring, with 2008 revenues of $99 M.  Aspect’s  Biospectral Index™ (BIS™) technology — became the first clinically proven and commercially available direct measure of the effects of anesthetics and sedatives on the brain. Aspect developed proprietary technologies that directly measure these effects and ultimately improve the quality and cost effectiveness of patient care. BIS technology was designed to reliably gauge the precise amount of anesthetic medication required by each patient.

ASPM had closed at $7.67 on Friday, 9/25/09 and has risen 55+% since the announcement. Covidien will provide the scale and resources to accelerate growth of BIS and other Aspect products.  A former competitor and comparable, Physiometrix, also a Mass. company had been acquired by Hospira in 8/05 for approximately $23 M in cash plus the repayment of the company’s bank debt of approximately $1 M.

Aquisitions seem to be lifting investor confidence and enthusiasm as the market heads into earnings season.

All agree that small-cap healthcare companies – if they are to survive – need access to capital. Referencing  previous financing and structures posts: these events could be a sign of a broader market recovery as I-Banks ramp-up their capacity and capability in restructuring, advisory and underwriting. Large and small investment banks such as: Wells Fargo, Bank of America Merrill Lynch, Centerview Partners, Jefferies & Company, Morgan Joseph, Thomas Weisel Partners and Leerink Swann have hired bankers amid expectations of financing activity.

Pharma’s biotech acquisitions over the past few months have also renewed interest in the sector as patent protection and new drug introductions are declining. Bankers think that M&A will boom … but, I might “slightly” disagree as more partnering, joint-ventures, licensing deals and option agreements will be initiated as – “why buy the cow when you can ‘license’ the milk” thinking pervades Pharma … which minimizes risk.

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I keep reiterating, research coverage is still the starting point of an investment decision. It’s extremely time consuming for the buy-side, individual investors and retail brokers to research  small-cap stocks that trade under $1-2.00; there are just too many risk factors associated with “penny-stocks”!

There is a recovery – but, CEOs need to better focus their VISIBILITY. As the market rebounds uncovered companies are subject to depreciated attraction for financing when compared with their analyst covered peers. Are analysts publishing insightful recommendations or just … fulfilling a follow-up … if that or … is it just about fees and commissions?

Attracting investors is the momentum driver for any share price appreciation. Investors need to be stimulated, reassured and enlisted. Independent research identifies and validates share pricing insight or forward reference points. In this market, reviews should include detailed survival or sustainability benchmarks, a stated valuation model including its peer group comparison. Catalysts and milestones in relation to peers are most important as investors need to understand forward-looking recommendations.

Bottom Line: Individual investors and retail brokers are doing more … and more of their own research. Ultimately, the acid test of research performance is an appreciating share price that – opens – doors to “All” investors. There is a lot of money on the sidelines and there is no quick fix for an investment; but, consistent, quarterly coverage builds confidence, legitimizes sustainability and positions valuations for market upticks and needed financing.

Another financing vehicle is being utilized by small-cap healthcare companies: the Standby Equity Distribution Agreement (SEDA). This relatively new “mechanism” is another … alternative to the traditional PIPE, Registered Direct Offering (RDO) or secondary offering to assist small publicly-traded companies raise additional capital by selling new stock without making a formal market offering.

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In today’s capital markets; this old but new (usage) capital-raising rage has many small-cap healthcare companies filling their coffers after finding that public equity (PIPE) offerings are limiting due to their “current” stock price circumstance.

• Registered Direct securities offerings (RDOs) raise capital from investors groups. The issue has been avoiding the depreciating pricing that usually accompanies a PIPE offering provideing investors with registered stock that is immediately tradable and liquid. PIPEs tend to have sales and timing restrictions. This RDO process uses a single-purpose registration statement if a company does not have a shelf registration or if the company already has a shelf registration statement on file with the SEC. Since RDOs  are targeted to institutional investors; they are less likely to be subject to SEC review,
• An RDO  involves a  better timing or distribution process as a company’s stock is usually “shorted” by hedge investors upon filing of PIPE registration statements. The SEC has also relaxed eligibility requirements for issuers to NOT sell more than 33% (one-third) of its public float over any period of 12 calendar months. Since there is no illiquidity risk being borne by investors; RDOs usually price at a lower discount-to-market than PIPEs,
• RDOs are most usually common stock, issuance although issuers may sell other types of securities, including convertible notes or warrants or combinations with each other,
• The RDO is a “hybrid” transaction that fits the “current” market conditions by cash starved companies providing a timely, confidential and efficient financing alternative. However, an RDO is “STILL” a “public offering” under the securities laws, which makes it possible to allocate shares to retail investors with immediate liquidity that trade on a “when issued” basis,
• A short sample of companies utilizing RDOs: GNBT,VRUS, CVM, CYTK, INO, NBY, OGXI, CYCC, BPAC, RNN, OXGN, GTF, GNVC, EMIS, CTI, BPAX, PTN , HYTM, TSX:CJB and more.

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