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Heisenberg Principle is a full time private individual investor and trader.
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  • American Realty Capital Warns Of Dilution: Is Anybody Paying Attention?

    After my article entitled REITs: Why The Dividends Are A Mirage came out, I was asked "politely" to issue a retraction especially concerning American Reality Capital (NASDAQ:ARCP) and the issue of dilution. In short, I made a case that the dividend paid out by REITs that simultaneously issue even larger amounts of equity are diluting at the same time as paying the dividend, making the economic effect of the dividend itself a wash (except for the REIT tax savings). As there's no guarantee of future returns with a REIT (or anything else for that matter), an equity raise for cash is always dilutive upon executed, and any "accretive" benefits will remain to be seen in the future. My thesis was met with a combination of laughter and angry, so I thought I owed it to readers in their search for alpha to make sure the record is correct and readers get as much information as possible, especially after bullish another article came out discussing ARCP's acquisition of ARCT III which stated, "the merger was accretive to shareholders."

    Instead of finding evidence to retract my article, what I found from ARCP's 10K filed just last week on February 28 (same day as the merger), I found what is apparently near-verbatim of my own words warning investors, even printed in black bold from ARCP management stating quite clearly the exact opposite of what the two articles above claimed. The 10K warns investors in no uncertain terms that the merger is indeed dilutive and warns about the dilution that comes from raising money while paying dividends. Interestingly enough, a search for the word "accretive" in the 10K turns up only one time in 130+ pages, and it is preceded by the word "not" to form the phrase "not accretive."

    Page 35, it can't get any clearer than this, and it's not a laughing matter (emphasis not even mine):

    Your ownership position will be diluted by the Merger of us and ARCT III.

    The Merger of us and ARCT III will dilute the ownership position of our stockholders. Following the issuance of shares of our common stock to ARCT III stockholders pursuant to the Merger Agreement, assuming 70% of the Merger consideration is paid in the form of shares of our common stock, our stockholders and the former ARCT III stockholders are expected to hold approximately 9% and 91%, respectively, of the combined company's common stock outstanding immediately after the Merger, based on the number of shares of common stock of each of us and ARCT III currently outstanding and various assumptions regarding share issuances by each of us and ARCT III prior to the effective time of the Merger (provided, however, such dilution could be greater than described herein depending on the number of shares of ARCT III common stock with respect to which ARCT III stockholders make stock elections). Consequently, our stockholders, as a general matter, will have less influence over our management and policies after the Merger than they exercise over our management and policies immediately prior to the Merger.

    Page 19,(emphasis added):

    If we fund dividends from the proceeds of offerings of securities, we will have less funds available for acquiring properties or other real estate-related investments. As a result, the return you realize on your investment may be reduced. Funding dividends from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding dividends with the sale of assets or the proceeds of offerings of securities may affect our ability to generate cash flows. Funding dividends from the sale of additional securities could dilute your interest in us if we sell shares of our common stock or securities convertible or exercisable into shares of our common stock to third party investors. Payment of dividends from the mentioned sources could restrict our ability to generate sufficient cash flow from operations, affect our profitability and/or affect the dividends payable to you upon a liquidity event, any or all of which may have an adverse effect on your investment.

    I realize some will say that the funding of dividends come from the earnings and not from the capital raises, but if the capital raises are going on at the same time as the dividends are being paid (which is often the case), then the next effect is identical. It doesn't matter whether you use the credit card or the debit card or the checkbook. More money is being funded from the sale of additional securities than by earnings by a long shot. I understand ARCP has to pay out a dividend to retain its REIT status and save money on federal income taxes so the dilution is a good thing, but it's still a reality. Just as ARCP's 10K warns.

    Overall, I think ARCP is a great REIT that has good odds of continuing to provide positive alpha for investors throughout 2013. I think it's important though for investors to get the full story and not be blinded by only one side. A well informed investor has a better chance of success than one who only seeks one side. ARCP in this reader's opinion will do well despite the dilution. Good luck to all.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: ARCP
    Mar 06 1:24 AM | Link | 2 Comments
  • Is Amarin The Next Celsion? 10 Eerie Similarities

    "Every once in a while I'd have to take a beating. But by then, I didn't care. The way I saw it...everybody takes a beating sometime." Ray Liotta in Goodfellas

    Make no mistake about it. I took a beating on Celsion (NASDAQ:CLSN). I was overoptimistic about the odds of success in their Phase III trial for ThermoDox designed to treat patients with hepatocellular carcinoma (liver cancer), After CLSN announced the results its Phase III trial, the stock got hammered nearly 90% since due to failure to meet its primary endpoint. CLSN fooled this writer. I have learned my lesson. Amarin (NASDAQ:AMRN) will not fool me. This writer/investigator has learned a rude lesson about these types of drugs over the CLSN debacle. The experience made analyzing AMRN easier and more accurate. Since AMRN's drug Vascepa is an EPA-only (ethyl eicosapentaenoic acid) fish oil pill that lacks in the bad cholesterol raising ingredient Docosahexaenoic acid (DHA) while significantly lowering triglyceride levels, it a very different drug than ThermoDox. However, two stocks are investments and this article is analysis of investments -- not medical sciences. And the two of them have eerily similar aspects.

    While the drugs are very different, the stocks are investments and this article is analysis of investments -- not medical science. In the end, the fundamental reason CLSN fells 90% is because of the hopes of commercial success of ThermoDox for its first indication got crushed and the market cap for the other pending indications was called into question. Today CLSN sits with a $33 million market cap and is burning through cash every quarter. AMRN has now launched its drug for its first indication, but without a successful launch that reduces cash burn instead of increases it, AMRN will become no better than a biotech that has failed to get approval. What good is having a commercialized product if all that does is create larger losses? AMRN has hired an army of almost 300 sales and marketing personnel yet so far after a month the results look dismal at best with analysts downgrading their expectations at least in the short term. Meanwhile, AMRN still manages to have a $1.14 billion market cap. It is 100% pure speculation to justify it this high and close to 40 times the size of CLSN. If AMRN fails to show any measured, profitable success with this indication, it will call into question future indications (after they get FDA approval). FDA approval and successful Phase III trials are certainly much better for AMRN versus CLSN in the area of science, but from an investor perspective in the end they are both just products and if cost AMRN more to deliver the product than it brings in from it, it is just as bad (and actually worse) than having no product at all like CLSN (yet). I fear AMRN is heading down a similar path of CLSN, albeit in slow motion.


    1. Both talked a big game about partnerships but failed to deliver and at the final hour both were proud of their "go at it alone" strategy. AMRN is now 100% launching Vascepa alone, something CLSN was going to do with ThermoDox in the United States (or will still do if it ultimately gets approval for another indication such as for breast cancer). From AMRN's Q3 conference call:

    Consistent with our 3-option strategy, an acquisition of Amarin, a strategic collaboration, or self-commercialization, the latter of which could include third-party support

    Not only did the first two fail, thus far, but even its "go at it alone" strategy lacks the third-party support touted in the Q3 call. No mention whatsoever of it in the Q4 call.

    2. Both ThermoDox and Vascepa contain as active ingredients decades old "drugs" (ThermoDox uses encapsulated doxorubicin as the active ingredient while Vascepa is EPA, used by people in various forms since before biblical times)

    3. Both huge short positions. In my experience, especially learned the hard way with CLSN, when a short position is this overwhelming large especially in a biotech, there tends to be some very sophisticated and well informed shorts in there. AMRN's last reported short interest was at a whopping 25 million. Despite the poor performance of the stock, this short interest set a new record at last report and has been consistently growing in size. The short ratio likewise is at new highs of around 8. Similarly just before CLSN's great fall, short interest spiked to record levels.

    4. Both AMRN and CLSN have had cult-like followings. In both cases any time a negative article came out, one could immediate expect a blizzard of angry insults to fill the comment sections.

    5. Both have over-confident management that over-promises and under-delivers. CLSN management was calling ThermoDox " of the most important new drugs in a generation"

    6. Both one-trick ponies relying on one drug (though for multiple indications) with nothing else in the pipeline.

    7. Both most recent conference calls sounded more like funerals in tone than their usual "Party like it's 1999" confidence.

    8. Both had huge runs and were pricing such high success at such lofty levels you would have thought the second coming of Jesus Christ on almost upon us with a specific mission to aid these companies.

    9. Both fooled and dazzled investors with talks of patents and anecdotal observations of praise, neither of which spells commercial success.

    10. Both had very small teams despite their market caps. AMRN 31 employees (prior to sales force hiring) and CLSN 19 employees at last count.

    I am short AMRN at higher levels and continue to hold as a result despite the risks of being short. Vascepa could certain show a large improvement in sales or a company could suddenly become interested in helping them out through either a partnership or buyout. Caution is advised if anybody wishes to short AMRN at this level as it would be a high risk endeavor. One may want to consider further protection with the use of cheap call options just in case.

    Disclosure: I am short AMRN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I have CLSN calls.

    Mar 01 3:37 PM | Link | 3 Comments
  • Adam Feuerstein Strawman Fallacy

    A strawman argument is a rhetorical device that is meant to easily prove that one's position or argument is superior to an opposing argument. However, the straw man argument is regarded as a logical fallacy, because at its core, the person using the device misrepresents the other person's argument. The person does this because it then becomes easier to knock down the weaker version of the opposing argument with one's more substantial counter argument. The term straw man derives from the use of scarecrows for military practice, such as charges. In reality, a scarecrow is far easier to defeat than an actual person.

    In AF's article, he 100% misrepresents what I stated:

    1. "Heisenberg's base assumption is that Amarin's prescription-grade fish-oil pill Vascepa is no different from the fish-oil supplements available in grocery stores."

    I made no such assumption (until the very end as a concluding and stated opinion). I mentioned that there's no clinical proof either way. And there isn't. Other OTC fish oil pills are and will continue to be competition for AMRN.

    2. "If FDA questioned whether Vascepa and OTC fish oil were the same, the agency could have demanded OTC fish oil be used as the comparator against Vascepa in the MARINE trial"

    It's the FDA's job to decide safety and efficacy versus placebo not versus competitors. Concern or not, there is no clinical evidence that AMRN's snake oil is any better than OTC fish oil. It might be, but there's no clinical evidence either way.

    3. "Published studies have not found regular fish-oil pills lower death rates or reduce heart-related disease."

    I know this. That was part of my point. You are just repeating me rather than countering me.

    4. "A lot of the bad news and worries about the Vascepa launch are baked into the stock at this valuation."

    $1.3 billion market valuation. One drug with one indication. Negative book value. Huge losses expected by all 10 analysts. "Meh" ?

    Conclusion -- Though I grown to respect your research and viewpoints, Adam Feuerstein, you didn't critique a single thing properly in this instance. Perhaps I should have made my points more clear, and you wouldn't have made the sloppy misreads that you did.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AMRN over the next 72 hours.

    Tags: AMRN
    Feb 15 10:27 AM | Link | 18 Comments
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