The Long Case For Emisphere: Expecting A Buyout

Nov.10.11 | About: Emisphere Technologies, (EMIS)

I have received numerous inquiries surrounding the false starts in Emisphere’s (OTCQB:EMIS) shares being that a monumental type event is only weeks away. I believe that I have uncovered the problem and I wanted to share it with my Seeking Alpha audience.

Shares from recent financing deals are holding us down - right now! Emisphere participated in an equity financing back in July for $3.75 million dollars. That financing was executed at $0.872 with 70% warrant coverage with a strike price of $1.09. The warrants were a sweetener to entice investors to invest in an aggressive equity deal. Unlike the past two financings, Emisphere didn't register the shares 30 days post deal, instead they registered the shares on October 13th (70 days), the same day as the negative osteoarthritis (OA) data from Novartis (NYSE:NVS) was released. The registration freed 4.3 million shares ($3.75 million/0.872) and 3 million warrants (4.3 million shares x.70). This automatically created an artificial seller of the shares.

You see, some of the participants in the deal do this type of financing deal for a living and they don't care about the company they care about the process. If the stock is up they sell no matter what is coming, or not coming down the pipe. I did some legwork on this and found that holders of $1.5 million (1.7 million shares and 1.2 million warrants) of the $3.75 million deal are not selling the shares or warrants at this point. That means that the potential sellers from this past deal have approximately 2.3 million shares and 1.6 million warrants. Emisphere has traded 6.8 million shares since the registration date of October 13th. I believe that the sellers from this past deal are very close to being exhausted. If this is the case then cleaning out the $2.00 price level should be easy as we should see buying interest outweigh selling interest and Emisphere’s shares could be trading north of $3 - $4 in front of Novartis’ osteoporosis (OP) news.

Alongside the financing deal in July that raised $3.75 million from institutional investors, Emisphere raised an additional $3.75 million from MHR their largest shareholder. For those of you unfamiliar with MHR, they have quite an impressive track record. Aside from being the largest shareholder in EMIS they are also the largest shareholder in Leap Wireless (LEAP), Lions Gate Entertainment (NYSE:LGF) and Loral Space (NASDAQ:LORL). In 2010, MHR had two companies that they were top shareholders in bought out. Those two companies were L-1 Identity Solutions (ID) and Pride International (PDE).

Here are some reasons why investors may want to speculate on Emisphere based on MHR's current and past investments:

Recently, MHR increased their stake in Leap Wireless after the shares fell from around $15 to $6. MHR publicly purchased 8 million shares in August for an average of $7.48, today the shares are trading at $9.20 after impressive quarterly results.

A position, around which there has been much publicity is Lions Gate Entertainment (LGF) where they have accumulated over 40 million shares. The shares traded sideways between $6 and $7 for three and a half years but just recently broke out and are closing in on $9. This has been a clear win to anyone that has been buying LGF these past few months.

Loral Space (LORL) has been a big winner for anyone that has followed MHR on this name. MHR purchased a large block of shares in the $30’s and two years later the shares topped out at $80+ per share.

The buyout of L-1 Identity Solutions (ID) by Safran (SAF.PA) for $12 represented a premium of 24% over the closing price on the day before the announcement was made and was a 66% increase for the year. Pride International (PDE) was bought out by Ensco (NYSE:ESV) for $41.60 which represented a 21% premium.

Since Emisphere is a bulletin board stock MHR does not have to report its holdings. As such it has fallen under the radar of many investors who have profited from investing alongside MHR. I believe EMIS will be another stock of MHR's that gets taken over as Novartis and Novo Nordisk (NYSE:NVO) seek to own their own drug delivery system. The price tag should reach $15 - $20 on a takeover or from selling the drug delivery system to respective companies in the next 12-36 months.

Disclosure: I am long OTCQB:EMIS.