The latest news from Benitec announces that the company is to apply to the NASDQ for an Initial Public Offer. The company is expecting to raise $60-70M before fees. Up to 115,000,000 will be issued, which is roughly a 50% dilution for existing shareholders. So, is this a good deal?
I have been an advocate of Benitec having some sort of IPO in the US. My preferred model was to carve off the hepatitis assets and IPO Tacere. This is not going to happen and so an IPO for the parent company, Benitec Biopharma (OTCPK:BTEBD, OTCPK:BNIKF), is the next best thing. However, is the timing right?
There a number of pros and cons as I see things (see below). When I first read the announcement, I was not too impressed as there is nothing new in the prospectus. This means that there is a 50% dilution with no new value being identified. After giving the matter some further consideration I have come to the conclusion that, on balance, the IPO is a good move.
Why do I say this?
There are a number of reasons for my opinion but the main one is that doing an IPO in the near future will secure significant funds in order to progress the company's pipeline. A few months ago, I wrote about TT-034 not being a binary outcome for the company. The reason for this opinion was that a trial for Tribetarna was due to start this year and this would provide a new lead if TT-034 performed below expectation. As there will be no other trials underway before TT-034 efficacy results are known, securing new financing now substantially reduces the risk of the affects of TT-034 results. This capital raising effectively replaces the start of the Tribetarna trial as the Plan B for the company.
The IPO is to be fully underwritten. This means that the underwriter carries most of the risk, however, there could be some downside, see below.
Listing on the NASDQ will give the company greater exposure to sophisticated biotech investors in a way that the ASX and the OTC markets do not.
Last few announcements by the company seem to indicate that management may have learnt its lesson about forecasting company events. This leads me to think that the statements in the prospectus may turn out to be a better reflection of expectations than previous efforts.
The risks associated with the investment have been very well explained in the prospectus.
The AMD program is to be fast-tracked with more funding and this is a good outcome as this is a program that is likely to attract the interest of big pharma.
50% dilution for existing shareholders is not what most want to hear.
A review of share price movements in BTEBY, the original ADR vehicle, will tell investors that management has not done a good job of protecting shareholder value. This could backfire on the underwriters.
The capital is only expected to last the company two years. This assumes that the trials for HBV and AMD will progress according to plan but, as we know, the company has not been good at forecasting trial milestones (see pros above).
More capital will be required in two years if no other, non-dilutive capital is obtained. Business development has not kept pace with Benitec's competitors and this is a risk that needs greater focus.
Tribetarna (NSCLC program) is clearly experiencing problems. The new capital will be insufficient to see the start of the trial. This trail was supposed to start in 2012 and it is now clear that even more funding will be required before any results are available for this program.
If the ADR placement is not fully subscribed, the underwriters may have to trickle ADR's into the market in order to recoup their costs. This could see the price depressed for some time.
On balance, the risk reduction is worth the dilution, but only just. The management and Board need to take this new capital and convert it into value in a way that they have not been able to do in the past. If they cannot convert this capital into shareholder value, then who will invest money in the company in two years time?
Disclosure: I am/we are long BTEBY, BNIKF.
Additional disclosure: This article is not intended to be investment advice. Readers should do their own research.