Teva Pharmaceutical Industries (TEVA) Chairman Dr. Phillip Frost bought $5 Million worth of Prolor Biotech (PBTH) stock, according to a filing with the SEC last week. Prolor raised $35 Million from healthcare investors to fund development of a highly anticipated longer-acting version of human growth hormone, or "hGH." Frost, who is the single largest investor in Prolor, owns about one fifth of the company, which explains in part his participation in the latest offering. The billionaire healthcare entrepreneur has been buying Prolor stock for months, suggesting shares are undervalued. His latest purchase, at $5 a share, helps mitigate the effect dilution would have had on his overall stake in the company - steady at 20%.
Prolor was among several biotechnology firms to see tremendous interest from institutional investors in May. For many development-stage healthcare companies, investment from institutional investors often comes in the form of a placement, usually during an initial or secondary public offering. What's interesting is that higher-quality companies generally tend to attract investment at more favorable terms - or at a smaller discount rate, looked at another way. We analyzed 3 names in biotechnology that recently completed offerings to fund the development of late-stage products and/or an early-stage commercial launch. We recorded our findings in the table that follows (below).
|Recent Biotech Public Offerings|
|Company||Offering Price||Discount||Size (Gross)||200DMA|
|Arena Pharmaceuticals Inc. (ARNA)||$5.50||9.20%||$69.6MM||$1.95|
Synergy Pharmaceuticals Inc. (SGYP)
|PROLOR Biotech Inc.||$5.00||12%||$35MM||$5.00|
The second column (to the table above) relates to the immediate discount offered on shares to prospective investors. For volatile issues, this may be quite arbitrary. For example, Synergy traded upwards after the Food & Drug Administration (FDA) delayed review of Ironwood's (IRWD) constipation-predominant irritable bowel syndrome (IBS-C) drug, Linaclotide. Investors speculate that results from Synergy's IBS-drug may be superior and even coincide with a decision from the FDA on Linaclotide. The setback, therefore, narrowed a potential time gap to market between the two, competing, drug candidates. But for the better part of 2012, prior to the FDA delaying review of Linaclotide by 3 months, Synergy traded near $4 a share. When shares spiked to $7 on the FDA news, the price appeared overextended. Institutions rightfully valued the company nearer its long-term moving average price, represented as the 200-day simple moving average or '200DMA' in the table (above). Relative to this benchmark, institutional investors showed a great deal of confidence pricing the offering near market price(s).
Arena secured financing shortly after an FDA advisory panel recommended approval of their weight-loss drug candidate, Lorcaserin, by a vote of 18-4, winning over even their harshest critics at TheStreet.com. Investors are optimistic but Nathan Sadeghi-Nejad cautions that like peer Vivus (VVUS), a final decision for Lorcaserin could be delayed 3 months "to give the FDA more time to craft an effective Risk Evaluation and Mitigation Strategy, or REMS", the columnist wrote last week. As big a problem as obesity may be, no single drug has seen sales >$1 Billion in this indication. But even as the debate rages on, and an FDA decision nears, sophisticated investors have essentially insisted that Arena is "fairly-valued' at $5.50 a share, plus an expected return (i.e. the 'discount'). As with Dr. Frost's direct investment in Prolor, institutional investment in Arena bodes particularly well for the company ahead of a seemingly less and less binary event (as investors are suggesting approval is more likely than not).
Synergy, which appeared to have been priced at a sharper discount relative to the names discussed here, actually priced at a premium to its 50-DMA, an indication that the company is worth more than what the market is pricing it at. Remember, sophisticated investors usually use a discount that will allow them to realize a desired return on investment. Ahead of anticipated data from a late-stage trial, investors are expecting the price to advance. Synergy's Chairman, Gabrielle Cerrone, was the principal investor, founder, and Chairman of FermaVir Pharmaceuticals, which Inhibitex bought in 2007. As a result of the acquisition, Cerrone was one of the largest shareholders when Bristol-Myers Squibb (BMY) bought Inhibitex for $2.5B this past January. Cerrone's M&A experience in healthcare is yet another reason why institutional investors are betting on Synergy to perform well down the road.
At least at one point last week, all three issues fell below their public offering price. On Monday, all three issues rebounded, ending at least at par with the price sophisticated investors paid for shares of Prolor, Synergy, and Arena, respectively.