It did not take long after my last article regarding Retrophin (NASDAQ:RTRX) for the company to make some serious news. Less than 24 hours after the article was released, the company issued a flurry of announcements in two different press releases (see here and here). First, the company announced that it had signed a binding commitment on a $40 million senior secured term loan facility, provided by Athyrium Capital Management and maturing in 2018, and entered into definitive purchase agreements with a group of institutional investors for the purchase and sale of $40 million worth of 4.5% senior convertible notes due 2019. Second, the company announced that it has entered into a license agreement with Mission Pharmacal Company for U.S. marketing rights to Thiola® (tiopronin); in connection with this announcement, the company revised its revenue and earnings guidance upwards for the third time in the past 45 days. Given the fact that these announcements came so quickly following my last article, I thought that a follow-up analysis of the announcements might be useful for market participants.
Convertible Note Issuance Buys Time, Allows Retrophin to Refinance Manchester Debt
The issuance of $40 million worth of convertible notes at 4.5% will allow Retrophin to refinance the indebtedness owed to Manchester Pharmaceutical that was to become due over the next seven months. Assuming the placement agents for these notes take their customary 3% fee from the proceeds, and after deducting legal and other customary expenses incurred in issuing the notes, that would leave approximately $38.5 million in net proceeds to the company. $33 million of these proceeds should be conservatively invested and earmarked for paying off the Manchester debt. Thus, the company may have around $5.5 million remaining to use for general corporate purposes. The CEO remarked on last Friday's update call that these notes were issued to some of the company's existing equityholders, which indicates that at least some of Retrophin's large shareholders are willing to continue to bankroll the company, at least to the limited extent of paying off the Manchester indebtedness.
Status of Senior Secured Term Loan Facility Unclear
The company announced that it had signed a "binding commitment" with Athyrium for the $40 million term loan facility, which was "subject to customary closing conditions". Interestingly, the CEO on Friday morning's update call stated that the company had already received the $40 million from Athyrium, indicating that the term loan facility had already closed (it is highly unlikely that Athyrium would advance the funds to Retrophin with only a "binding commitment", rather than an actual term loan agreement in place). However, as of the writing of this article, there is no indication on Athyrium's website that the transaction has closed. For example, under the "News" heading on Athyrium's site, there is no announcement regarding the transaction. Nor is Retrophin listed as an investment under the "Portfolio" link. Had the transaction closed late Thursday or early Friday, as the CEO seemed to indicate on Friday's call, one would have thought that something regarding Retrophin would have been posted on Athyrium's website on Friday. But this did not happen.
In addition, even assuming that the term loan agreement had been signed and closed between the time Retrophin issued its press release (4:46 pm Thursday evening) and the time of Retrophin's update call on Friday morning (which was 8:30 am), it is unlikely that Retrophin would have already received the loan proceeds by the time of the update call, since wire transfers are normally only processed during banking hours (or between 9 am and 4 pm on business days). One is thus left to wonder how the CEO could make the statement on Friday morning that Retrophin already had the extra $80 million from the term loan facility and convertible note issuance in the bank.
While the exact terms of the loan facility cannot be determined until Retrophin files the transaction documents with the SEC, the company will be paying a steep interest rate in order to borrow the $40 million from Athyrium. Per the press release, the interest rate will be Libor + 10%, with a Libor floor of 1%. Thus, the rate will be a minimum of 11%, and could be higher, depending on where Libor is in the future. Apparently, these were the best financing terms available to the company in the marketplace. In addition, the term loan will probably be secured by most, if not all, of Retrophin's assets (i.e., its drug pipeline). This means that in the event that Retrophin ever defaults on the facility, Athyrium will be able to foreclose on the collateral and sell off the assets to repay the debt. This makes owning the equity of Retrophin incrementally more risky for shareholders, as the company has now become levered and its assets pledged. It will also be interesting to see what negative covenants are contained in the term loan agreement, and the extent to which they restrict Retrophin from making further portfolio acquisitions.
Transaction Documents Expected to be Filed with SEC Within Four Business Days
Luckily, much of the uncertainty regarding the terms and conditions of both the convertible notes and the senior secured term loan facility should be dispelled when the relevant transaction documents are filed by Retrophin with the SEC. The company will need to file a Form 8-K regarding these financing transactions within four (4) business days (see 8-K rules here), meaning that the filing needs to occur no later than Wednesday, June 4th. The transaction documents should be filed as exhibits to the 8-K filing, so investors should be able to more carefully scrutinize the terms thereof when the filing is made.
Acquisition of U.S. Rights to Thiola Does Not Appear to be a Game Changer for Retrophin
Retrophin's announcement of the acquisition of U.S. marketing rights to Thiola from Mission Pharmacal does not appear to move the needle much for the company. The exact terms of the Thiola deal were not disclosed. However, according to the Friday update call, Retrophin apparently paid a very small amount for the rights, less than the company's cash balance of $3.7 million as of the end of Q1 2014 (so perhaps somewhere in the neighborhood of $2-4 million). As also stated on the call, the drug, which has been around since 1988, has only generated revenues of around $2 million annually for Mission, and is only used by a few hundred patients. Retrophin's CEO further stated on the update call that the royalties payable by Retrophin to Mission for Thiola would be in the "double digits". While we can thus rule out 0-9%, where in the remaining range of 10-99% the number falls cannot be determined. Nor can the cost that Retrophin will need to incur to set up a sales force to market the drug. It is striking that Mission, which specializes in urology, would jettison Thiola so quickly after launching a dedicated sales force in August 2013 in part to market the drug.
Given the foregoing, I believe that it is safe to say that the statement by Retrophin's CEO on the update call that the Thiola acquisition somehow creates $10 per share of net present value for shareholders (or a whopping $255 million in aggregate) does not even pass the laugh test. A more sober analysis would indicate that the acquisition of the Thiola rights may, viewed optimistically, create a net present value for Retrophin shareholders of between $5 million to $10 million, an amount double to triple the apparent purchase price, or between $0.20/share and $0.40/share. Viewed less optimistically, it could be a money-loser for the company, depending on how high the royalty rate payable to Mission is and how much the sales force for the drug will cost Retrophin going forward.
Difficult to Determine Whether Revised "Guidance" is Realistic or Not
It is also extremely difficult to determine whether the updated "guidance" that Retrophin provided on Thursday is realistic or not. The updated revenue numbers appear to be based on the assumption that Retrophin will be able to substantially increase the price of Thiola to patients. Only time will tell whether these revenue increases actually materialize, so investors will need to stay tuned regarding this point. The company also stated that 2015 non-GAAP EPS will be $0.75 to $1.25 per share, and 2015 non-GAAP "Earnings Power Per Share", or EPPS, will be $1.50 to $2 per share. Unfortunately, it is virtually impossible to determine whether and how these amounts will be achieved, as the company's definitions of non-GAAP EPS and non-GAAP EPPS are quite vague and subject to manipulation. Based on the company's press release, the definitions can be summarized as follows:
|Non-GAAP EPS||GAAP EPS adjusted to exclude transaction related expenses, as well as non-cash items such as stock compensation, depreciation and amortization, non-cash interest expense, and other non-cash adjustments, such as the increase or decrease in the fair value of derivative liabilities associated with the Company's warrants. In addition, certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred.|
|Non-GAAP EPPS||Non-GAAP EPS adjusted to exclude certain projected expenses, including research and development expenses, public company-related expenses, interest expense and taxes on projected earnings at the Company's anticipated effective tax rate|
Given the malleability of the foregoing definitions, virtually any result can be obtained by the company for these metrics for any given period, thus significantly reducing their usefulness as guidance for investors. One influential biotech and pharma commentator, however, appeared to be sufficiently impressed by the company's ingenuity to engage in the following rather humorous exchange with certain of his followers:
CEO's Tweets Immediately Prior to Announcements Come Under Scrutiny for Possibly Tipping Followers to Material Nonpublic Information
An interesting subplot to Retrophin's announcements involved the tweets sent out by the company's CEO immediately prior to Retrophin's stock being halted following trading hours last Thursday. A Bloomberg reporter picked up the story Friday morning, which can be summarized as follows:
|3:40 pm||Shkreli tweets "everybody having a nice day?"|
|3:42 pm||Follower @ColfaxCapital replies to Shkreli "youre [sic] such a kind man :)"|
|3:42 pm||Shkreli tweets "this is one of the best days in my life!"|
|3:45 pm||Follower @ASeizew tweets "yes thanks. Going to buy 1000 shares of $RTRX through my Schwab account right now to celebrate it"|
|4:00 pm||RTRX shares are halted pending news|
|4:41 pm||Retrophin capital raise and portfolio acquisition news hits the wires and RTRX shares leap 30% in after hours trading|
The foregoing certainly seems an interesting sequence of events given the strict SEC rules and regulations regarding the disclosure of material nonpublic information (see here and here for further information). When asked for comment on the Bloomberg story, Retrophin's CEO stated the following:
I think the [Bloomberg News] journo who wrote this is a moron. LOL.
The SEC would need to determine whether the foregoing actions by Retrophin's CEO and his Twitter followers crossed the line of legality, so I will offer no opinion this issue. However, the CEO's questionable tweets and flippant response to the Bloomberg story is certainly another red flag for any investor contemplating an investment in Retrophin, especially in light of the other red flags outlined in my prior article, including the failure to disclose pending material litigation in Retrophin's SEC filings, as well as the company repurchasing a material amount of Retrophin shares on the open market shortly before issuing equity, without previously alerting the market that it would be doing so.
In summary, while the capital raise actions by Retrophin appear to address the company's near-term liquidity issues and give the company a bit more runway to execute its business plan (perhaps up to a year) before needing to raise additional capital, the Thiola portfolio acquisition is likely a letdown for those who had been hoping for a big announcement from the company. Investors appear to agree with this analysis, as Retrophin stock sold off heavily on Friday during the final few hours of trading, ending the day at $14.62 after initially jumping as high as $16.82 intraday in an explosion of short covering. In addition, the CEO's Twitter behavior should clearly be disappointing for shareholders, who should expect more from the CEO of a Nasdaq-listed company.
Overall, I believe that not much has changed fundamentally for Retrophin since last Wednesday (the date of my previous article) and that the company remains significantly overvalued. Therefore, I reiterate my $3 per share price target.
Disclosure: I am short RTRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.