Regulus Therapeutics: Serious Red Flags At This Public Offering

| About: Regulus Therapeutics (RGLS)

Regulus Therapeutics (RGLS) made its public debut on Thursday. Shares of the biopharmaceutical company focused on the discovery and development of first-in-class drugs targeting microRNAs ended their first day up 5.0% to $4.20 per share.

The public offering

Regulus Therapeutics was formed in 2007 when Alnylam Pharmaceuticals and Isis Pharmaceuticals tried to pursue the development of drugs which target microRNAs. The company is currently optimizing anti-miRs in five programs independently, and on a partnership basis with AstraZeneca AB (AZN), GlaxoSmithKline (GSK) and Sanofi (SNY).

The company sold 11.25 million shares for $4 a piece. Regulus raised $45 million in gross proceeds in the offering process. Based on the offer price of $4.00, the firm is valued at $130 million.

The offering is quite a disaster. The offer price was set far below the low end of the preliminary $10-$12 price range set by the firm and its bankers. The firm eventually sold 11.25 million shares, with another 6.25 million shares offered to AstraZeneca as part of a $25 million investment. In total the firm sold 17.5 million shares, with no shares offered by selling shareholders.

As the company wanted to raise $70 million in the offering process, the number of shares offered increased from a planned 6.5 million to 17.5 million, as interest was hardly existing. In total, 54% of the company's shares were offered. At Friday's closing price of $4.25 per share is valued at $138 million.

Major banks which brought the company public were Lazard Capital Markets, BMO Capital Markets, Needham & Company and Cowen and Company, among others.


Regulus believes it has developed a leading position in the microRNA field. RNA plays an important role in the process to translate genetic information from DNA to proteins.

Under the strategic alliances, the company is eligible to receive up to $1.7 billion in milestone payments upon successful commercialization of microRNA, for the eleven programs. Regulus anticipates to nominate at least 2 clinical development candidates within 12 months, and file the first new drug application with the US Food and Drug Administration in 2014.

For the full year of its annual 2011, the company generated revenues of $13.8 million, on which it lost $7.6 million. For the first six months of 2012, revenues came in unchanged at $6.7 million. The company net lost $4.8 million, compared to a loss of $4.5 million in the first half of 2011.

Regulus will use the net proceeds of the offering for the preclinical and clinical development stages of initial microRNA candidates. Furthermore it will try to identify more microRNA targets.

Excluding the offering proceeds, the company operates with $27 million in cash and $10.6 million in total debt, for a net cash position of roughly $16 million. Adding $70 million in gross proceeds from the public offering, the firm operates with a net cash position of roughly $75 million.

As such, the valuation of Regulus Therapeutic's operating assets comes in around $63 million. Based on a rough annual revenue estimate of $14 million, the market values the operating assets at 4.5 times annual revenues. The company will again lose money in 2012.

Investment Thesis

The offering of Regulus Therapeutics is an outright disaster. Shares were offered far below the initial guided price range of $10-$12 per share. Shares were eventually offered at $4 per share, and saw a modest rebound to $4.25 at Friday's close.

As such, shares are trading some 61% below the midpoint of the initially guided range. The fact that the company is not generating any revenues from actual products at this time, and the foreseeable future, is freaking out investors. Furthermore, the fact that insiders accepted significant dilution in the offering is a red flag as well. As a matter of fact, to keep total proceeds from the offering stable, the company sold 17.5 million shares, compared to the planned sale of 6.5 million shares.

It goes without saying that shareholders in Regulus should not anticipate to receive dividends anytime soon.

The offering has been terrible and I suggest you stay out. While AstraZeneca might always try to take out the company on the cheap, if products are really promising, one should stay away. The fact that management actually accepts this kind of dilution, indicates how ridiculous the initial guided price range of $10-$12 really was.

I will stay on the sidelines, despite the potential for $1.7 billion in milestone payments.

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.

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