- PLX has raised funds with a private placement.
- Warrants with an exercise price of $2.36 were issued, these could bring in more funds, but they aren't exercisable yet.
- PLX is a while away from truly high impact data that would convince the market regarding the competitiveness of its Fabry disease drug, PRX-102.
Protalix Biotherapeutics (NYSE:PLX) is an Israeli biotech company developing protein therapeutics using plant cell technology. The company sought to shore up its financial position in March with a private placement, which means existing investors were diluted, but the damage to the shareholder might not be over yet.
The private placement
On March 12, PLX notified investors that it had secured securities purchase agreements to raise $43.7M (net proceeds were expected to be $41M). The company issued and sold ~17.6M shares at $2.485 per share. In order to secure the purchase of the stock at this price, the company had to offer a bit of a sweetener. Each share came with a warrant, meaning 17.6M shares worth of warrants were also issued, with an exercise price of $2.36 per share. Now, if exercised, those warrants would bring in an additional $41.5M in proceeds, which is good news for PLX's cash balance.
Table 1: Historical prices for PLX stock. Note, the name was volatile around the time of the announcement of the private placement, and by the time of closing on March 18, the stock was well below the price of $2.485 per share. Source: Yahoo Finance historical prices.
The warrants associated with the private placement are not yet exercisable, despite the fact that with PLX in the mid $4s at the time of writing, it is in-the-money.
Figure 1: Screenshot of warrant terms. Source: Exhibit 4.1 of the Form 8-K filed March 12 concerning the private placement.
...the Warrants are not exercisable until the six-month anniversary of the Closing Date, which is more than 60 days from the date of this prospectus.
Comments on the warrants in an S-3 filing from April 17.
A concerning potential scenario
By the time the warrants are exercisable (six months from the closing date, so about mid-September, 2020) if PLX is below the exercise price, then one would not exercise the warrants. By this time, shareholders of the stock, given it is falling in this scenario, would likely have dumped their stock and may use these warrants as insurance (a hedge) on a short position. Life sciences investor and founder, David Sable, notes the issue of too many outstanding warrants in an article from 2013.
If portfolio managers own warrants and sell the stock short, they risk nothing more than the strike price of the warrants for each share sold short. If the stock runs, managers can easily cover. Even better, if managers sell the stock short and the stock price drops, they can cover the short sale in the open market, reap the profits from the trade and still own the warrant. When the shares rise again the process can be repeated, each time with a well-quantified risk.
When a large number of warrant holders hedge their portfolios in a similar way, the underlying stock has difficulty rising too far above the strike price of the warrant.
David Sable, "The Curse of the Poor Capital Structure," Wharton Magazine, May 2013.
In the PLX example then, should the stock be below $2.36 by mid-September, the name may have a hard time rising too far above that level again for a while. If warrant holders take a different strategy and instead choose to exercise their warrants and sell, each sale is a factor that can drive the price back below $2.36. Yahoo Finance has the average volume of PLX at ~138K shares per day at the time of writing. As such, 17.6M shares worth of warrants corresponds to about 128 days' worth of volume. That is a lot of shares to turnover. There would need to be some high impact news to help the stock clear 17.6M shares worth of warrants. Approval of a drug or positive data might do it, but as a company enters the commercial stage, it often finds itself in the doldrums such as the delay between NDA/BLA submission and approval or the even bigger delay between phase 3 results, NDA/BLA preparation, NDA/BLA submission, and eventual NDA/BLA approval. That period can be 12 months.
PLX underperforms and may continue to do so
The stock has generally underperformed the biotech indices and broader market over time.
The upcoming milestones are quite soft and it may not be until Q4'20 that PRX-102 sees approval in the US. What is really needed is to show that the company's lead candidate PRX-102 is going to steal market share from other Fabry disease drugs. The company is going to need results from BALANCE to do that, a head-to-head study of PRX-102 vs. agalsidase beta (Fabrazyme). That entire study is 78 patients, and so, it is hard to imagine an interim analysis (due H1'21) being a sure thing in terms of producing a statistically significant beat of Fabrazyme.
Figure 3: PLX upcoming milestones. Source: February corporate presentation.
Financial overview and conclusions
The company has done what it needed to raise an additional $41M in net proceeds, it had just $17.8M in cash and cash equivalents at the end of 2019, and despite total revenues of $54.7M for 2019, the company still reported a net loss of $18.3M for the year. The company also had $51M worth of long-term liability from convertible notes at the end of 2019. Although the possibility of conversion to shares instead of the repayment of the principal is in play, the conversion price for the 2021 Notes of "approximately $8.50" per share according to the 10-K makes this seem unlikely right now. Net cash used in operating activities was $19.4M, so at current burn rates and considering the $41M raised plus the convertible notes, PLX still doesn't look in great shape financially. The company isn't going to go bust this week but expenses could increase in 2020 as the company prepares and submits the BLA while still running BALANCE and BRIGHT, and I don't see PLX having much wiggle room to actually do that. PLX would be fine if all those warrants were exercised as another $41.5M would help address the convertibles outstanding, and so it seems even more important the name stays well above $2.36 to incentivize exercise of those options.
Don't say PLX can't go below $2.36 between now and when the options become exercisable. After all, it was just below $2.36 within the last month. I find myself bearish on PLX all things considered.
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