The Short Case for Advanced Magnetics (AMAG)

Jul.11.06 | About: AMAG Pharmaceuticals, (AMAG)

AMAG is a developer of superparamagnetic iron oxide nanoparticles for applications in medical imaging contrast agents, which basically provide clear MRI pictures for early and efficient diagnosis of diseases. The company was founded in 1981 by MIT graduate and current chairman and CEO Jerome Goldstein. Sexy as the business sounds, AMAG's numbers tell a different story.

After 24 years of operations, revenues stood at a meager $2.44 million for FY05, halving since 2003. The market cap is an inexplicable $370 million (yes, you read that right). The company made a $12.7 million loss in FY05, and has cash and short term investments of about $50 million as of 3/31/2006, the majority of which ($33 million) came from the issuing of new stock in Q1 this year (cash from financing), which has saved the company from being cash flow negative.

The stock is up 400% since November 2005 despite non-existent earnings and dwindling revenue. It seems like the company simply issues more and more stock when it needs cash - it raised $9.7 million in FY03 and $17.3 million in FY05, besides raising an additional $33 million in the first quarter this year.

To top it off, insiders have been offloading shares like D-Day is here. CEO Goldstein has sold over 40,000 shares since June 15 representing about 15.5% of all his shares in the company, to pocket over a million dollars for himself. Director Michael Loberg has sold over 70,000 shares since June 5, to make a neat $1.5 million. Another director in the company, Edward Roberts, has sold over 90,000 shares in the last month. On top of these sales, several insiders have exercised options worth hundreds of thousands of dollars more.

There must be good reason for the insiders to lock in the wild gains, especially with Q2 earnings to be released on July 20. If the major stockholders have no confidence in the future of the company, which has prompted them to sell off shares in this manner, why should the average Joe hold on? AMAG seems to be a classic Ponzi scheme, and I expect the earnings release of July 20 to wake up the market to the reality of AMAG.

AMAG 1-yr chart:

AMAG 1-yr chart