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A Window of Opportunity to Buy Emisphere. 14 comments
When Emisphere's news release entitled "Emisphere Technologies Reports DMC Recommendation to Proceed with Phase 3 Clinical Trials with Oral Calcitonin for Osteoporosis and Osteoarthritis" hit the wires last week, it was the single biggest event in the company's history. If you weren't already totally up on the story the significance probably would have been lost on you. The Data Monitoring Committee based their recommendation to proceed upon "an assessment of safety and efficacy parameters." Translation: that the drug is safe (should come as no surprise to anyone that read my previous articles) and that we are hitting our primary endpoints in both trials. This was absolutely huge news, which we greeted with open buy orders. It is my opinion that it is no longer a question of whether Oral Calcitonin will be approved for both indications or not; it is merely a question of timing, and the timing of approvals might be sooner than most are expecting.
Novartis has been playing their cards close to their vest with the entire Oral Calcitonin program. In my opinion they are doing this because they know they have a huge winner on their hands and they want to keep the competition in the dark as long as possible; that is why we have yet to see any publication of data from the Calcitonin for Osteoarthritis Phase 2 trial that was completed almost 2 years ago. I sincerely believe that when we start seeing some actual data from the Phase 2 trial people will be absolutely blown away by the results that will show significant widening of joint space width and a significant regrowth of cartilage. Novartis has said that they will wait for the completion of the US Osteoarthritis trial to file in the EU but I do not see why they would do this. I think that they will file in the EU in the early summer of 2010 and have approval in late 2010, which would mean commercial revenues much faster than people are anticipating.
The Osteoporosis trial also appears to be 2 full years ahead of the time-line spelled out on the clinicaltrials.gov website. We were not supposed to have our futility look until September 2011. Calcitonin is already a standard of care for Osteoporosis; we are just changing the delivery to oral so the shorter time-line would make more sense especially given the safety profile. I think that Novartis always had the option of going with a shorter study if the data were overwhelmingly good. I think that this is what is happening and that Novartis will be able to get FDA approval in late 2010 or early 2011; way ahead of schedule. This would mean commercial revenues from both Osteoporosis and Osteoarthritis start hitting in Q1 2011.
So if Oral Calcitonin is really going to get approved for both indications and it is going to happen a lot sooner than people expect then why is the fully diluted market cap of the company a mere $60 million? There are two reasons. First, the secrecy and confidentiality of the Novartis partnership prevents Emisphere from clearly explaining the development of Oral Calcitonin. Investors must figure it out for themselves. Second, the last financing was managed very poorly and was very dilutive. There were two funds that bought a total of 5.2 million shares in the August financing and they got 100% warrant coverage. They appear to have been selling their shares and taking their risk capital off the table, keeping the warrants for profit. This would be carrying out a trading strategy rather than a fundamental strategy. They look at it and say we paid 70 cents for our investment so if we can sell our entire common stock position at an average of 70 cents or better we will have recouped all of our initial investment (or in this scenario even a little profit in addition) and we will still have the same amount of warrants as stock that we bought that are priced at 70 cents. Therefore if the stock goes up we still make a killing on our warrants while already having taken the risk off the table. That is why the stock has not moved but I think that the sellers are getting down to tag ends. Get in now before the seller cleans up; I think this stock is going to be up substantially by the end of January(yes, next month) and it will still be dirt cheap as investors begin flocking to this opportunity.
Disclosure: Long EMIS.
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This post has 14 comments:
A quick comment on the "botched" secondary. The other half of that secondary including giving MHR (largest shareholder and dominates board of directors) cover to buy shares with full warrant coverage even cheaper than the two funds. The 2 non-MHR directors supposedly handled and blessed and blessed this financing that created significant dilution, with the company being on record promising shareholders that any financing would be non-dilutive, or minimally dilutive.
Non-surprisingly, shareholders were not pleased with this secondary; and the stock cratered even further from pre-secondary levels (maybe the 2 funds selling, maybe not).
The 2 non-MHR directors then mysteriously resigned from the board. Mission Accomplished for MHR !
The "botched" financing was perhaps the worst executed financing I have ever seen. Emisphere needs to address its MHR problem and stop screwing its shareholders. Whether this is simply incompetence or something more sinister, shareholders deserve better.
The Novartis news is fantastic. Many will tell you however, that MHR's involvement in the company is a huge albatross over this company. Fix that, and this company can be a 20 bagger or more from here.
but I don't understand why Novinski and other officer insiders own little to no common stock if EMIS is so undervalued?
I think you missed the big story - which is what is that other compound Novo signed up for. Given the story with Merrion and if EMIS has better tech then I'd guess it is Insulin but they are keeping quiet. That would be huge.
Per a previous post one of the non MHR directors was later upgraded.
How on earth could they dislodge MHR short of a sale of the company? If the tech has value they are ging no where except for a robbery of the common holders.
It looks like they are confident of coming up with the equivalent of about $15-25MM in the next 4-5 weeks without dilution to fund working capital and the Novartis Note. That means a new partnership. B12? Insulin? Growth Hormone? Something else?
Once through that this is a 10-20 bagger. Has to be.
Remember that Novartis has a convertible note with principal of $10 million and accrued interest (I'm guessing) of $5 million. Novartis will likely convert the note into common and instantly become a 20% shareholder, more than MHR. btw, you are right that MHR is there to stay.
However, your estimate of short term wc needs is much to high. On 9/30/09 EMIS had $7 million in cash and equivalents on the bs. With an annual cash burn rate of
$7-8 million, they are good thru the summer. Remember, revenues from the new B12 product will bring in six/seven figures in 2010. I'd love to know what the relationship between MHR & Novartis is? and if Novartis has representation on the EMIS board?
p.s. - just went to SUNY Stony Brook Medical School library and read the recently published article in Rheumatology Reports. There is a disclaimer at the top of the article that states the conflict of interest the authors have at Nordic Bioscience. The article was painfully objective and only refers to EMIS' technology as a "recent novel" CT delivery application, without mentioning names.
Over the weekend I tried to get my hands on more/new information about EMIS. As you know that's very difficult to do with this company. The vast majority of the third party info is published by J.R. Thanks for all the research Joe. And by the way I don't agree with J.R. on all the stuff that he writes on EMIS. For example, during the past year he has been consistently overly optimistic. But that score is about to change!
We had significant accumulation of the shares today, most of which occurred in the last 90 minutes between $1.21 and $1.23/share. Similar to what occurred in the last few days of December 2009.
However, I wanted to address another issue tonight and invite your feedback. Why is everybody so down on MHR? He has made major purchases of EMIS stock as follows: 1st purchase on 5/9/06, 960,000 shares @ $8.26; 2nd purchase on 8/22/07, 455,000 shares @ $4.01; and 3rd purchase on 8/21/09, 6 million shares @ $.90/share!!!
Yes, MHR was a bit early, but he has consistently supported this company since becoming a director 6 or 7 years ago. Not to mention, he has more skin in the game with a whopping $15 million convertible note. btw, I'm pretty sure that both convertibles (MHR's & Novartis') are not economic until the shares go above $3-$4 (depending on the tranche). Moreover, the guy is extremely bright having graduated Stanford Medical and Business Schools. All this info, along with J.R.'s commentary persuaded me to make a significant long term IRA investment in EMIS below $1/share in late December. I'll think about selling some of the position when it's in the low double digits. It might take a few years but I'm convinced it's going to happen! What do you think?
Although I'm not a technical analysis type investor...there is one measure that has worked for me in the past...that is identifying the Golden Cross! Of course I should have made this observation before making a sig. initial investment, but better late than never.
It signifies the end of a downtrend and the start of a short/intermediate term uptrend. I have used the 50 day moving average as the short term indicator and 100 day moving average as the long term indicator. When the st indicator rises above the lt indicator the Golden Cross occurs.
In EMIS' situation the Golden Cross occurred on or about Jan. 7, 2010.
Looking back at the 5yr/daily chart, it's impressive. A Golden cross occurred six weeks after a 10 month rally started that registered 300% in 2005/2006. Another golden Cross occurred in 2008 eight weeks after a
4 month rally started, 300% return.
Conclusions that I have made include:
after a massive 10 year downtrend from $80/share, EMIS has begun a long term uptrend; for the short term, we have the Golden Cross that occurred last week; a major insider purchase made 5 months ago; three late Phase III trials that appear positive. That's enough for me, what do you think?
EMIS has few institutional & individual investors. EMIS has zero formal Analyst coverage on The Street. There are very few shares outstanding, especially when you take out MHR's position...he has never sold a share!
Oh btw, it's going to be volatile and not for the faint of heart...but it will be fun.
i was disappointed that nobody responded to my 2010 comments on emis...but in German we say...mach nichts...next stop
$4-5/share in 2010!
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