One month ago the Chairman of Benitec Biopharma (NASDAQ:BNTC) said that the company was about to raise $60+M in an IPO and list on the NASDAQ exchange (refer to speech 22 July 2016). The share price then was $0.81 on the ASX and the ADR's were at an equivalent of US$11.80 on the OTC market. This was not an ideal situation but, with circa $18M, in the bank it was not too bad.
Some people were disappointed that the IPO was scheduled for a date prior to the results from cohort three of the clinical trial for TT-034, a treatment for HCV, being announced. I did not share that view and said so publicly because I believed that the $60+M would be a very good risk reduction strategy, mitigating any possible below expectation results from the clinical trial. At that time, I thought that management had done a good job in getting an IPO fully underwritten at $60+M.
Fast forward to today and we have had an IPO which only raised about $12M net. The ASX share price is down 31%. The ADR price is down 32% and the new capital won't even cover the cost of taking the next pre-clinical program into clinical trials.
What changed so much in the course of one month?
Well, I do not have all the answers and only the company's management can truly answer that question but I can pass on some comments and observations and that is what this article is all about.
One theory that I have heard is that management decided to reduce dilution and so reduced the ADR's available with a view to raising more capital after TT-034 results are available. I find this argument to be very unconvincing.
The Chairman made it clear that the company was seeking capital and dilution was described in detail in the IPO prospectus. So, either the Chairman was not telling the truth (which I doubt) about the nature of the IPO, or the IPO process was mismanaged, or the company sales team was unable to convince investors of the benefits of Benitec's technology and pipeline.
I favor the latter reason.
Another theory that I have heard is that biotech is no longer flavor of the year and so the timing was wrong. Again, I find this an unconvincing argument. Nobody asked Benitec to IPO now, it had sufficient funds to carry the company well into 2016, so timing was a management decision for which they should take responsibility. Blaming the market and timing does not wash with me. Furthermore, I do not see any evidence that there has been such a significant change in the biotech sector since the Chairman's comments were made (WAVE just raised $66M in an oversubscribed Series B financing.)
I also heard that US investors saw through Benitec's risk reduction strategy and took the IPO as an indication that the TT-034 results will be below expectation. This perception, therefore, kept these investors away from the IPO.
There may be an element of truth in this theory but I think that the facts will not support any such perception. Yes, the company was probably aware of the biopsy results of patient six in the trial at the time of the IPO and investors would have known this. However, whether good or not so good, the results for a single patient in the third cohort cannot be taken as an indication of the final outcome for the TT-034 trial. There is no statistical significance in the results from one patient and so it is understandable why management did not want to release any new TT-034 data during the IPO process, even if the results were encouraging.
Some people have said that the IPO is a vote of no confidence in management. There is probably some element of truth in this statement too. If this is the case, then something needs to be done to change this perception.
What Do We Know?
We know that the IPO has made no difference to the technology.
We know that the IPO has made no difference to the results that will come from the TT-034 clinical trial.
We know that our world-class scientists are still beavering away in our own lab.
We know that it was Benitec's intention the raise $60+M in order to advance its pipeline and take the HBV and AMD programs into the clinic.
We know that what we actually got in cash is about $12M, net.
We know that Tribetarna, Benitec's treatment for Non-Small Cell Lung Cancer, was to be put on the backburner, whatever the outcome of the IPO.
We know that Benitec's sales team has failed to convince any of the big pharma companies to invest in Benitec or to partner with the company.
We know that the IPO Roadshow presentation failed to excite interest in potential US investors.
We know that management has consistently failed to keep self-imposed deadlines, especially for clinical trials.
We know that the IPO has seen a significant loss of wealth for many existing shareholders, a least on paper.
Put Everything Together And What Do We Get?
When you put everything together you do get a somewhat ambiguous or contradictory picture. On the negative side, it is a picture of a Board that does not know what is going on and a sales team that cannot get the message across to big pharma or investors. On the positive side, you get a technology picture that has not changed one iota since before the IPO and a management team that tried to raise capital to mitigate risk in the business.
The bottom-line here is that both the ddRNAi technology and TT-034 still have the same potential as they did before the IPO but the clumsy attempt at an IPO and the subsequent lack of investor support has dented management's credibility.
What Can Be Done?
From reading the IPO prospectus it is clear that the IPO did not raise sufficient funds to ensure that results from a trial other than the TT-034 trial will be available before more capital is required. The company needs more cash!
In order to get that new capital, either through a deal or another capital raising, something needs to change.
The Board/management team cannot keep doing what they have done in the past with the same old presentations, etc., and expect the outcomes to be different.
To attract the interest of big pharma (Benitec's stated means of commercializing its pipeline) the company needs good results from the TT-034 trial and a change in the sales approach and the sales team.
In terms of attracting the interest of new investors when this tranche of capital expires, the company needs to bring on board corporate and/or institutional investors. In my opinion, corporate/institutional investor are looking for four things when they consider and investment.
Four things that corporate and institutional investors consider are:
- Can management deliver on what they say they will do?
- Has the technology been endorsed by big pharma?
- Are there proven results?
- Is there a market for this technology/pipeline?
It may not be necessary to get a tick in each box but that would help.
In Benitec's case, management has frequently missed timelines that they themselves created. Furthermore, the latest, clumsy effort at listing on the NASDAQ will not have been received well by industry watchers. The only remedy, therefore, is to make some changes at both the Board level and senior management level. I feel this is the best way to restore confidence in the management of the company.
A new sales approach could catch the eyes of both big pharma and big investors. One such approach would be to focus on the benefits that the health payers will obtain from one-shot treatments. I wrote an article about Benitec being the health payers dream biotech and the possible implications for the company. One-shot treatments for major indications may not be the current business model of large pharmas but the health payers should be really interested. Imagine what market share a pharma could create if it was the first to break ranks and offer single shot treatments for a wide range of major indications; single shots that were the preferred treatments of all the major health payers?
If the results for TT-034 are promising, then this would be the perfect opportunity for the new sales team to start a new campaign with investors and big pharma alike. As there will be no other results available before the current capital runs out, TT-034 has now assumed even more importance. Even if the potential revenue from TT-034 is to be limited and it is not a blockbuster, its relationship to our HBV treatment must be made clearer as HBV is still a high revenue target.
If the results for TT-034 are not promising, then the team should pick one other indication, such as AMD, and form a new business plan around that program. All spending on other programs should cease with the idea of utilizing the limited funds to get this program as near to the clinic as possible. There is no use in having five horses in a race if none of them get to the finishing line. It is much better to have only two horses in the race and use the limited, available resources to get at least one over the line. That line being results sufficient to form the basis of a deal or new investment.
The future of the company largely depends on the results of the TT-034 clinical trial. However, on their own, the results won't restore the market's confidence in the Board/management's ability to take the company forward. Their catalogue of fumbles is too great for that. As such, some Board members should be replaced and a new sales team needs to be brought on-board as soon as possible.
The TT-034 results combined with a refreshing new approach to the market will give the company its best chance of doing a deal and /or raising capital in the future. Doing the same old, same old is not an option.
Disclosure: I am/we are long BNTC.
Additional disclosure: This article is not intended to be investment advice. Readers should do their own research.