Can "soon" move the market? Deals Whispered, not Signed

Good morning,

Welcome to today's edition of The Armchair Analyst, a 5-minute daily update on the ASX life-sciences sector.

There is a stillness in the markets today.

The sun is shining, the 4C landslide has passed… 

We can all now breathe a sigh of relief, knowing exactly where the company stands on its cash runway.

Importantly, we can reset our expectations over the next few months and answer the question:

How will this company grow in value?

Because in small-cap land, movements in the share price are a function of two things:

Expectations and Reality.

The 4C report straddles both sides of the equation.

It’s a reality check.

How much cash runway do you have? Did you meet, beat or fall short of expectations?

But also, it’s an expectation reset.

What do you have to look forward to in the next quarter? What are the forecasts going forward?

Yesterday, I published my quickfire take on a number of 4C reports from companies that I was watching closely, but I wanted to double-click on two stocks in particular.

Dimerix (ASX: DXB) and Microba (ASX: MAP).

(I’ll make sure to spell Microba correctly this time! Sorry Luke)

While the 4C report was a reality check (particularly regarding cash runway), there was also an interesting reset in expectations about how they would overcome the challenge.

But first…

LTR Pharma (ASX: LTP) interim Phase II data for its nasal spray viagra showed a median onset time of 10 minutes and comparable results between the geriatric (65+) and adult cohorts. (LTP)

🪑 Nice result, definitely a “bull case” scenario.

The next major catalyst will be the results of the end of phase 2 meeting with the FDA, and if this data is enough for LTR Pharma to register the drug under the 505(b)(2) pathway.

AVITA Medical (ASX: AVH) appoints Cary Vance as permanent CEO following his interim tenure. (AVH)

Noxopharm (ASX: NOX) research partner Professor Michael Gantier published an early version of a research paper containing in vitro data on lupus and rheumatoid arthritis for NOX’s technology. (NOX)

Didn’t cover this one off yesterday, but Aroa Biosurgery (ARX) beat revenue guidance and nEBITDA guidance driven by stronger-than-expected sales. (ARX)

🪑 👏

Share prices are forward-looking.

If I buy a stock today, how will it make money in the future?

When a quarterly 4C report comes out (or any material announcement for that matter), it is a stamp in the ground showing where things are right now.

The share price moves UP or DOWN based on the result and the expectations going into the result:

If expectations are high, results have to be very good to move the share price…

If expectations are low, then even a ‘just good’ result can get things moving…

But 4C reports are a bit different to standard update announcements on a clinical program or product release.

4C reports reveal the company’s cash balance.

This talks to the expectation: when will the company need more money?

Early-stage biotech and medtech companies that don’t generate revenue (or aren't yet break-even) will need to raise capital from the market to fund operations.

It’s a natural part of the game.

To attract capital, these raises are generally done at a discount (with some form of incentive options).

This creates two issues for companies that are “come raise”.

FIRST, investors may sell down their position, with the intention of buying back in the raise.

SECOND, buyers may wait for a capital raise or for clarity on financing before buying in.

This puts pressure on the share price (to a point where expectations are low).

This means that any financing that occurs OUTSIDE of shareholder dilution from a capital raise can itself be a “Bull Case” scenario.

What I noticed with two separate companies is the hint of non-dilutive funding in the 4C report.

These are designed to raise expectations and allay fears of a capital raise.

With expectations raised, the goal is to either stem the bleeding or move the share price higher.

A higher share price gives companies more flexibility and a stronger BATNA when negotiating deals behind closed doors.

BATNA = best alternative to the negotiated agreement, a concept from the book “Getting to Yes”. Stronger BATNA = better deal and easier to negotiate stronger terms.

If the market doesn’t know about these deals and the alternative funding solutions available, the share price craters, and the BATNA (which, in this scenario, is a capital raise) weakens.

BUT in setting expectations for a deal, the company has to deliver.

Delays will be further punished by the markets, as the cash clock eventually runs out.

It’s a risky play, and only one I would expect a company to use if they were actually very close to signing a deal.

That said, it’s never a deal until the ink dries.

So, what happened?  

Dimerix is in a Phase 3 clinical trial for a rare kidney disease called FSGS.

I’ve written about Dimerix this week as part of my biotech 165 challenge: 'Timing' or 'Time in' the Market? The Dimerix (ASX: DXB) Story 

The 4C report revealed that the company had $26M in the bank, making it clear to the market that it didn’t have sufficient capital to get through to the end of the clinical trial (after deciding against pursuing accelerated approval).

However, the company did explain its funding strategy (I missed this as I was scanning the 4Cs):

“Dimerix is in late-stage discussions with multiple parties, with terms received for access of up to US$50M in funding”

Based on what the company has outlined, it appears to be a royalty-style deal.

NOT a capital raise (and not a licencing deal).

Dimerix would give up a percentage point or two on its royalty payments in exchange for the funding today.

So, while the company had the “reality check” that it wouldn’t have enough cash to complete the trial…

This deal would reset expectations about its position as “come raise”.

The financing is not free; the company will likely have to give up either interest (in the case of debt) or a % of future cash flows (in the case of a royalty deal).

HOWEVER, this may be a much more attractive funding option as it looks to preserve equity in the company.

A US$50M raise would be essentially half of the company’s market cap as of today.

Microba sells gut microbiome testing kits.

I’ve written about them as part of my biotech 165 challenge: Trust Your Gut: The Microba (ASX: MAP) Story 

In the “Corporate Update” section of the Microba 4C report, the company hinted at a ‘significant corporate transaction’.

Let’s try to work it out…

Armchair detective activated.

The transaction would require “shareholder approval”, so it could be a takeover offer.

MAP’s largest shareholder is Sigma Healthcare, which is capped at $32 billion and would be a natural acquirer of the business.

However, the company says that the transaction would improve the financial position, which signals something more along the lines of a licencing agreement or asset sale.

This would make sense based on the company’s previously disclosed intention to find a partner for its therapeutic gut microbiome product… but not sure that would require shareholder approval.

Interesting… hmm.

Either way, I expect that highlighting this transaction is about creating a stronger BATNA, stemming the selling in the company and extinguishing the stigma of being “come raise”.

But now they have to execute… 

My take is that this tactic, of hinting at deals that are still under negotiation, is good if the company can deliver. And quickly.

Setting expectations for a transaction does give the company more flexibility in its capital strategy, but there is also an element of ‘trust me, I’ll deliver’.

Each announcement was, of course, caveat with statements like “still under negotiations”, “incomplete” and “subject to conditions”.

But it's out there in the market now.

Something could come.

The real test of trust is how the stock trades.

Generally, there is an initial period of grace that the market gives, but if the negotiations drag on, then so will the share price.

The cash is always the clock in this scenario. 

Negotiating the deal versus running out of capital is one of the toughest needles for any company executive to thread.

Deliver, and you’re a genius. Don’t, and dilution will come.

Execution is everything.

See you all next week,

The Armchair Analyst.

PS. I’m in Sydney next week. Let me know if you’re an ASX-listed company in town, and I’d love to meet.

So far, I’m catching up with IMR, CBL, CTE, ILA/ENP, RAC/TRI.

Also, I’ll be touring the Tetratherix (ASX: TTX) manufacturing facilities for its medical device; stay tuned for a write-up on that.