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I have been waiting to see how much Northwest Biotherapeutics, Inc. (NASDAQ:NWBO) would accomplish with their proposed public offering. They signaled the need of up to $25M, but ended up taking about $12M. This cleaned up the balance sheet and there actually is money in the bank (before there were more dilutive options, convertible notes and warrants than stock outstanding -- now its balance sheet is much more microcap pharma normal).

As with most biotech stocks, the market quickly priced to the offering. However, it took the second read of the press release before I understood that the warrants (NWBOW) issued to the institutional investors would have their own market and trade separately from the issued shares, as below.

The Warrants have a per share exercise price of $5.00, are exercisable immediately, and expire 5 years from the date of issuance. The shares and warrants will begin trading on The NASDAQ Capital Market today under the symbols "NWBO" and "NWBOW," respectively.

The principle of warrants* is unusual, but not new for me. However, actually determining a sensible valuation approach for them is. The market initially rated the warrants at $.50 and with the stock restarting at $3.50 the offering price of $4.00 was nicely matched. Should I buy stock or warrants? What risk/reward ratio is apparent? It shows some sophistication that Northwest provided wholesale and retail investors this option.

It didn't take long for the initial price to start looking good to me -- as others, more rapidly attuned, moved it up to around $1.00. So I need to use about $1.00 to look at scenarios. Might the warrants be a better vehicle than the stock for a trip to the Caribbean enjoying balmy breezes and swaying palms? -- while avoiding a deep dungeon/sweaty palms experience brought on by having to explain what happened this time.

Below is the simple spreadsheet that helped me quantify my thoughts.

Investment amount$1,000
Warrants purchased1000Future Stock PriceNet StockNet Warrants
Warrant Cost$1.00$1.00$714$1,000
Stock Price$3.50$2.00$429$1,000
Stock units purchased285.7$3.00$143$1,000
Strike$5.00$3.50$0$1,000
Scenario Z: $4.00$143$1,000
50% $1 and 50% $10 $5.00$429$1,000
Stock Return:571$6.00$714$0
0.5*$D$3+0.5*$D$13 $7.00$1,000$1,000
Warrant Return:1,500$8.00$1,286$2,000
0.5*$E$3+0.5*$E$13 $9.00$1,571$3,000
Zacks 12 mon. target $10.00$1,857$4,000
Smith Positive.22-->1.00$15.90$3,543$9,900
Smith best case.22-->9.00$143.18$39,909$137,180

You can see the calculation for what I might net at several potential stock prices. If I invest $1000 in NWBO stock at $3.50 or the same amount in NWBOW warrants at $1.00, this is what might I expect for returns. Future stock prices depend on the success of the Phase III trial and what the market will make of that. Also, it appears there will need to be another financing round before the clinical trial reports out. Interim financing is something at which Northwest has significant experience. High risk, but potentially high reward.

Zacks** October 15th report suggests a price target of $10.00. SmithonStocks** offers 2 comparative stock price increase events that might be similar with what could happen to NWBO -- should the Phase III clinical trial prove successful. (When the stock was at $.22, before the 16:1 reverse split, he suggested a positive trial result might yield a $1.00 stock price or with a best case a $9.00 price might be possible.)

I am somewhat speculative and somewhat conservative, so I looked at what could my average return be if there were a 50% chance of failure and 50% chance of a $10.00 price. One would expect a $571 return for the stock and $1500 return for the warrants on a $1000 investment over 1-2 years. Both stocks and warrants would provide a good return. Since either way on failure I would basically lose my investment, the extra leverage of warrants might be warranted..

I do expect (hope) the clinical trial will be successful allowing me to avoid the deep dungeon and enjoy the palms. Time and perhaps another financing round (sigh) will tell the tale.

Based on your analysis, what will you choose?

* Another example of free trading warrants is (NASDAQ:MNKD) and (MNKDW).

**I apologize if I have misused the quotes from Zacks or Smithonstocks or taken them out of context.

Source: Northwest Biotherapeutics' Warrants: Ticket To Caribbean Or Fast Route To Deep Dungeon?