- The sell-side may be inflating price targets to maximize its value in further equity offerings.
- The sell side also happens to be on the company's payroll.
- In a word: Conflict.
The Bad News
The relationships between Ohr Pharmaceuticals (NASDAQ:OHRP) and the sell-side appear to be far too incestuous. Ohr is a small pharmaceutical which is attempting to develop an eye drop to cure acute macular degeneration (NYSE:AMD) to replace or to supplement the current invasive treatment which involves intravitreal (eye) injections. On Tuesday, Ohr announced that the drug failed to achieve any reduction in necessary injections, or it failed with regards to the primary endpoint of the study. At the same time, Ohr reported that the treatment group did experience increased visual activity - a secondary endpoint of the study. What must be stressed is that the p-value, or statistical significance of this study was p=0.18, or the results were not statistically significant. A statistically significant p-value would be 0.05.
The Good News
The stock dived 30% upon release of the data, but staged a 35% comeback two days later. In the two days following the press release, two analysts have upped their price targets on Ohr and have indicated prospects for 200% upside. What gives?
The first report to hit the street was that of Jonathan Aschoff from Brean Capital. Aschoff boosted his price target from $21 to an astronomical $34. While Aschoff tries to paint the results as favorable compared to the Fovista clinical trials, his claim is simply that the placebo group in the Fovista trial underperformed, and that the Fovista patients require more injections. Still, Fovista appears to have outperformed Squalamine. Aschoff also projects $250 million in revenue in 2017, all without even Phase II trial final results. Remember that the treatment period in each study is 38 weeks, and it takes time to design, approve and enroll patients for these studies. Maybe I need some Squalamine because I can't believe the numbers my eyes are telling me.
Then Vista Partners stepped up to the plate for Ohr with a $31 price target. In Vista's report, there is just a lot of paraphrasing from Ohr's press release and conference call with a small smattering of comparisons to Fovista. How did the analyst, Ross Silver, get to $31? Maybe he pulled it out of his hat, we'll never know as he chooses to leave his valuation model out of the report.
Inflated Price Targets
What did these two analysts see? After taking a few eye drops of my own and peering into the fine print a lot becomes clear. First, the disclosures in the reports indicate that Ohr has paid both Brean and Vista for services in the past year. Which services exactly? Find that out and you will then know why these two shops are pitching the stock.
Let's start with the low-hanging fruit. When you are the co-placement agent for a company which constantly has to issue shares as it has no cash flows from operations, it's a wise idea not to trash that company. Brean is exactly in that situation. Does Aschoff believe his own reports or does he value Ohr's business so much that he is willing to publish skewed research? I'll let you decide.
I called Aschoff's office and spoke to his Junior analyst. She was able to read me some more numbers out of his model and essentially told me that they anticipate a marketable drug by mid-2017, they don't foresee the necessity for an aditional Phase II clinical trial, and they think that the drug will not need more than a single additional trial. Talk about assumptions..
Additionally, Aschoff has quite the dubious history. In 2003 he was fined $10,000 and suspended from all NASD-member associations.
Jonathan Matthew Aschoff (CRD #4220184, Registered Representative, South Orange, New Jersey) submitted a Letter of Acceptance, Waiver, and Consent in which he was fined $10,000 and suspended from association with any NASD member in any capacity for two weeks. Without admitting or denying the allegations, Aschoff consented to the described sanctions and to the entry of findings that he misrepresented himself as a medical doctor under an assumed name in conversations with members of the medical profession to obtain confidential information about the effect of a drug that was being developed by a public company for which his member firm was an issuer. The findings also stated that Aschoff was attempting to obtain the information so that he could issue a report on behalf of his member firm regarding the company that was developing the experimental drug. Aschoff obtained the confidential information but never used it in a report after being confronted about his deception.
Aschoff's suspension began March 3, 2003, and will conclude March 16, 2003. (NASD Case #CAF030003)
Now for Vista, a company which claims to act as a Registered Investment Advisor, but truthfully does a whole lot more. I like to make my articles a hands-on experience. Why don't you give the investor relations number from the bottom of Ohr's most recent press release a ring. Go ahead, 1-877-215-4815. Who picks up? Nobody. Instead you will be routed to the voice mail of Ross Silver from Vista Partners (who never called me back), the purported analyst who set the price target at $31. Too bad he doesn't disclose the exact nature of his material relationship with Ohr in his report.
Why didn't I contact the company itself? The number which they list for investor relations is Vista's and I couldn't reach them through the office or through SKS.
While I am no doctor, and certainly no lawyer, I can tell you one thing. The relationships between Ohr and its sell-side analysts is definitely ethically questionable. Which brings us to a greater point. The sell-side analysts all work for companies competing for the investment bank gigs of the companies they rate. They also don't want to risk their direct connection to management by giving a 'Sell' or an 'Underperform' rating to a company. There is no neutrality on the sell-side. Do your own research. Maybe Ohr has a promising treatment, I myself owned shares for a brief period. Maybe not.
I am not accusing anyone, I just find these numbers strange.
Finally, I don't doubt the fact that Squalamine may eventually become a marketable drug, I just see too many red flags here. Clearly, speculation and not fundamentals are driving the price of this company.
Note: Some commenters have accused me of holding shares in Opthotech (NASDAQ:OPHT), a competitor of Ohr. These allegations are false as I have never owned shares in Opthotech. Additionally, I have never been short Ohr.
Additional disclosure: This article is not intended to serve as an accusation or implication of illicit activity, rather it is to call into question the reliability of price targets on Ohr.