Lesson learned. Or should I write, Again and again? Just when you give your heart and soul to a biotech company, you discover just how risky they can be. Such is Tuesday's news for Zalicus Inc. (ZLCS) and Antares Pharma (ATRS). However, this may be a gift to the Antares faithful as I will later explain. How can I say this? I may pounce on Antares if the price is right.
On Tuesday, Zalicus filed SC 13D/A. The SEC filing records the disposition of common shares. It wasn't good news. A reliable source whose multiple emails sit in my SA inbox reports elsewhere that a company executive is stating that "half" of that company's holdings in Zalicus shares were sold by the principal shareholding firm over the last year or so. Tuesday's report represents just over 4.39% of 126,698,275 common shares. The 13D/A reads:
The MPM Entities sold an aggregate of 5,566,981 shares of Common Stock in open market transactions from September 20, 2012 through September 28, 2012 for aggregate proceeds of $4,263,797.
In addition, footnote #2 reads:
BV III GP and BV III LLC are the direct and indirect general partners of BV III QP, BV III, BV III PF and BV III KG. The securities with respect to which these entities share voting and dispositive power are held as follows: 4,612,780 shares of Common Stock by BV III QP; 308,986 shares of Common Stock by BV III; 138,316 shares of Common Stock by BV III PF; and 388,591 shares of Common Stock by BV III KG.
As you can see, not only did Synavive fail in its phase IIB clinical trial earlier in September, but now one of Zalicus' largest shareholders has sold a major portion of its holdings.
But worst of all, it was a Zalicus board member's company that sold a major position. Like it or not, that is newsworthy. It is news SA readers need to know in order to stay up-to-date. When a board member's company sells a major position, that's not the kind of news shareholders like to read.
Between 20-28 September 2012, MPM BioVentures et al sold a substantial position in Zalicus. The list behind MPM is long and complicated, so I prefer to quote from the filing:
This Schedule is filed by MPM BioVentures III-QP, L.P. ("BV III QP "), MPM BioVentures III, L.P. ("BV III"), MPM BioVentures III Parallel Fund, L.P. ("BV III PF"), MPM BioVentures III GmbH & Co. Beteiligungs KG ("BV III KG"), MPM Asset Management Investors 2003 BVIII LLC ("AM LLC"), MPM Asset Management LLC ("MPM AM"), MPM BioVentures III GP, L.P. ("BV III GP") and MPM BioVentures III LLC ("BV III LLC" and collectively with BV III QP, BV III, BV III PF, BV III KG, AM LLC and BV III GP, the "MPM Entities") and Luke Evnin, Ansbert Gadicke, Nicholas Galakatos, Michael Steinmetz, Kurt Wheeler, Nicholas Simon III and Dennis Henner (collectively, the "Listed Persons"). BVIII GP and BVIII LLC are the direct and indirect general partners of BV III QP, BV III, BV III PF and BV III KG. The Listed Persons are Series A members of BV III LLC and managers of AM LLC. Luke Evnin and Ansbert Gadicke are members of MPM AM. The MPM Entities and the Listed Persons expressly disclaim status as a "group" for purposes of this Schedule 13D.
But what's even worse is when you consider a MPM employee is a member of Zalicus' prestigious Board of Directors. Who is that? It is Todd Foley, the managing director at MPM. Imagine, the firm represented by one of Zalicus' seven board members has dumped a good portion of Zalicus shares. That is not good news.
Along with board member Frank Haydu of IParty (IPT) whose company shares go for a whopping $0.21/share, Foley's company over the last year or so has taken back half of its position in Zalicus. Add to that prestigious board member William Hunter's OTC firm Angiotech (ANPIQ.PK), that not too long ago declared bankruptcy, and English major Sally Crawford; Zalicus has an interesting mix of directors for a biotech firm. Judge for yourself. Penny land Frank. Bankrupt Bill. English major Sally. And MPM see-you-later Todd. That is four out of seven Zalicus Board of Directors that includes CEO Mark Corrigan who sits on the Cubist (CBST) board. Is something afoot here? Are they just waiting for the share price to fall to sell the firm to the highest bidder?
What was once a great opportunity that had me dreaming of $50/share, Zalicus appears to be in great turmoil. Former CEO Borisy's internal combinatorial medicine pipeline has been erased from the Zalicus pipeline. Borisy's permanent replacement, CEO Corrigan, may have been persuaded by Alexis and gambled on Synavive but lost the gamble at a cost of millions. Will that show up in Corrigan's paycheck? I doubt it. Half of Borisy's company was fired after his debacle. Now CEO Corrigan shares in Borisy's failed legacy.
Furthermore, CEO Corrigan is yet to add a major customer to Zalicus' cHTS technology in his entire administration-- a goal he stated back in 2010 (I remember as do others). Novartis (NVS) may be on the last year of its extended contract.
Zalicus is also in the process of paying back an almost $20M debt touted as a line of credit. While having enough cash to survive until 2014, the recent shelf-share filing suggests that Zalicus will go back to the ATM in 2013 as it did twice in 2012. Some are already talking that Zalicus may have to execute a reverse split with around 130M common shares going for less than one dollar!
I rate Zalicus a STRONG SELL. It has been a lesson in the volatility of biotech investing. Zalicus looks to be on the ropes, yet the CEO's salary is yet to reflect that. Meanwhile, there's still no news after more than a year whether Sanofi (SNY) will take Prednisporin forward. Investors are holding their breath for the results of Z944's multiple dose study.
At this point I think Zalicus could be bought out. If not, it's going to languish until Z160's results come in late 2013. Traders should follow this stock as volatility may spell opportunity. Nevertheless, the risk is equally enormous. If Z944 doesn't get out of phase I, Zalicus might as well be a one-trick pony (Z160).
As it is, until Zalicus learns to talk to its investors and present a picture of hope, the story here has turned quite sour. Unfortunately, hell will probably freeze over before CEO Corrigan addresses Zalicus shareholders in a Q3 report and explains how he plans to dig Zalicus out of the hole he has dug. I've yet to see Corrigan host a conference call. I doubt he's capable of doing it.
Sometimes people ask: How could I be so bullish about Zalicus and then become so bearish? Simple. Facts and information. It changes everything. One day the sun shines, the next day it rains.
After CNBC's Jim Cramer told viewers to sell Antares and the stock promptly plunged, the Antares faithful gripped their shares while nearly 20% in the share price trickled away. I of all people have repeatedly stated that Antares was a great firm, but I was shocked by the after-hours news (following Pfizer's (PFE) announcement of paying the firm $750,000 for an undisclosed product under development) that Antares was about to raise capital and dilute shareholders. Antares' timing is uncanny. Talk about the rug being pulled out from under your feet if you're an Antares' long-termer!
Here's what investors read:
Antares Pharma, Inc. (ATRS) today announced a public offering of shares of its common stock. This offering, which is subject to market and other conditions, is being made pursuant to its existing shelf registration statement under the Securities Act of 1933, as amended. Jefferies & Company, Inc. and Oppenheimer and Co. Inc. are acting as joint book-running managers for the offering. Antares intends to grant the underwriters of the offering an option to purchase additional shares of common stock. Antares plans to use the proceeds from the offering for further development of the Company's proprietary VIBEX™ methotrexate (MTX) Medi-Jet™ injection system for the treatment of rheumatoid arthritis, development of the Company's proprietary VIBEX™ QS T product for male testosterone deficiency and general corporate purposes.
CEO Paul Wotton, who has always appeared to be on the side of current shareholders, has sent them to the showers. How frustrating can it get?
With no hint or warning, Antares management has chosen to raise capital. And people like me will sweep in and buy shares at a much lower cost while the faithful will watch their accounts get raped of momentary profits. But that is the stock market! The lesson? Never marry a stock no matter how much you love it.
I will say that I never expected Antares to pull this stunt so soon. I doubt few did. We all knew it would take money to get Vibex MTX Medi-Jet for rheumatoid arthritis to market, but not until after the paperwork was filed with the FDA. Instead, Antares has pulled the trigger early. But is dilution always bad news? Not necessarily.
I am tempted to think that while CEO Wotton may be making present shareholders as mad as hell about the dilution, the long-term picture is to facilitate a sales force that will ramp up Vibex MTX Medi-Jet sales as quickly as possible by 2014. That is after all what the dilution is for including the development of Vibex QS.
Okay, it stinks when you're the one holding shares and your company dilutes. But on the other hand, I'm under the impression that Antares is executing on a strategic plan to become net positive Q/Q as quickly as possible. To do that, it takes money.
Meanwhile, the market may do what it does, but I will be looking for an attractive entry point once the dust settles.
Antares Is Not Zalicus
Zalicus is falling because its clinical trial for Synavive failed. Antares' share price may fall, and for other reasons that may frustrate current shareholders, but I think this will ultimately result in moving Vibex MTX Medi-Jet to market and Vibex QS forward. Bluntly, if Antares falls under $4/share (as some think) I'm going to be ready to buy shares like crazy. As a non-shareholder, I interpret this dilution as the best gift I could get before Halloween. I think Antares' is shortening its own time-line to profits and even if the firm gets sold, I can't lose.
I rate Zalicus a STRONG SELL while I rate Antares a STRONG BUY on the dip. For investors who ask, I'm holding strong on Acadia (ACAD) and would advise my followers to read my current article. Acadia's share price may have dipped, but I see that as a great buying opportunity. Savvy investors will get into Acadia before the run-up on news-- news I think has a high probability of being positive. Happy investing and use Tuesday's events in Zalicus and Antares to remind yourself that bad news can come just as unexpectedly as great news. That is the risk of biotech investing.
Disclosure: I am long ACAD.
Additional disclosure: Readers are advised: I may execute a position in Antares (ATRS) at any time including Wednesday's pre-market. Investors buy and/or sell at their own risk. For me "long" is until I sell. I do not "short" stocks. I declare that I may trade at any time any stock mentioned in this article. I strongly advise readers to seek the advice of a market professional. This article represents the author's opinion for entertainment purposes only and should not be used as individual investor advice.