Good morning Armchair Army,
Welcome to today's edition of The Armchair Analyst, a 5-minute daily update on the ASX life-sciences sector.
Sometimes, what happens with trades is this…
FIRST, I defined the bet.
IF that bet is something extremely short-term (and doesn’t work out immediately)...
THEN the due diligence comes in afterwards.
… To work out whether the assumptions that defined the first bet still hold.
Such was the case when I bought Opthea (ASX: OPT) as an extremely short-term trade.
A trade I’m now stuck in and need to work out what to do.
So let’s work it out together.
A little bit of background on Opthea.
Opthea was a darling of the market in 2024. The company reached $1.4 billion in market cap as it approached its Phase 3 clinical trial.
The trial failed. The stock has been suspended for 12+ months.
In that time, the company was trying to unwind all of the debts and salvage what it could from the business.
This week, it resumed trading, down 97%.
My bet was that, like Immutep, the stock would be well oversold when it finally resumed trading.
I was right.
It traded immediately under cash backing (which I worked out to be between 2.2 and 2.3 cents).
But I was wrong to think that, like Immutep, it would bounce back to cash over the next two days.
The selling was relentless.
Like playing a game of Mario, and you’re at the final boss battle.
Just when you think Bowser is defeated...
He levels up.
More minions. More lava. More sellers.
Such is the day trade.
What I wanted to confirm from my retrospective due diligence:
The true cash balance for the company
Whether the debt was ACTUALLY extinguished
I can confirm $31M cash (cash backing between 2.2 and 2.3 cents), AND the debt has been extinguished.
Fun fact, when I went back to confirm my numbers, I saw this…
Opthea published a profit of $340M for the last half year:
(Source, OPT Half Yearly Page 1)
An accounting quirk.
Where the ‘write-off’ is actually booked as profit for the business:
(Source, OPT Half Yearly Page 12)
Accounting quirks aside, I wanted to work out if I held my position through past my trade, what would I actually be betting on?
So I spoke to one of the Opthea board members (who I recently met at a Monsoon event), who was upbeat about getting the company relisted before June 30 and giving retail investors an opportunity to take a tax-loss sell.
Also, about the prospects of recovering a lot of the sunk costs incurred in drug manufacturing and seeing if they can gain some value from what they already have.
So that’s the bet now.
For Opthea to salvage the sunk cost in the asset and develop it through further clinical trials.
And the market is giving THAT bet a price ~$10M under cash backing.
But that’s not the whole story (at least not yet).
Given the volume of trading in the stock, an interesting corporate play has emerged.
(The brokers reading this just perked up!)
Opthea has 1.37 billion shares on issue.
Since yesterday, the company traded ~1.2 billion shares. Nearly turning over the entire register:
While a good portion would be day traders, it is still enough volume to build a meaningful position in the company.
At an average price of 1.4 cents (yesterday’s close), an activist fund or investor with a large balance sheet could buy a meaningful position in a company.
Buying $31M in cash, at a ~$20M value.
The volumes are what unlock this opportunity.
If an antagonist takes a meaningful position, things could get messy for the company.
(I mean, how much messier could it get!)
A similar thing happened after Percheron (ASX: PER) failed its clinical trial.
Now, I don’t know what will happen…
Whether someone is building a position or not.
But I’ll be very curious to watch the “change in substantial notices” next week and see if any opportunistic players take advantage.
What does this mean for the retail shareholders in the stock?
Until we know what the register looks like, there will still be some uncertainty about the company's future.
So it's a tricky one to play until more information comes out.
At least there is the fallback position of cash backing at 2.2-2.3 cents.
It’s a ‘watch this space’ for me, and a potential breakeven exit at my entry price of 1.8.
… as I said yesterday.
A long-term portfolio is just a bunch of short-term trades gone wrong.
Not financial advice.
Let’s dive in…
The Pulse Check
Not much is happening today. Everyone is waiting to see what happens with the budget, it seems…
EBR Systems (ASX: EBR) announces a fully underwritten A$150 million capital raising. (EBR)
🪑 Monster raise. Brandon Capital cornerstone and fully underwritten.
The stock was capped at $211M before this, so getting $150M into the tin is a good effort.
Racura Oncology (ASX: RAC) did a small strategic placement with a ‘specialist institutional investor’ for $1M at $1.90 per share. (RAC)
🪑 Don’t let anyone ever tell you that ‘the book is closed’... There is always a way!
ReNerve (ASX: RNV) appoints UG Medical as its distribution partner for the Malaysian market for its nerve repair product. (RNV)
🪑 Like all distribution deals, they have a high variance of success or failure.
It all depends on the quality of the distributor and their incentive to sell the product.
Microba Life Sciences (ASX: MAP) requests a voluntary suspension of its securities. (MAP)
🪑 🍿
See you all next week,
The Armchair Analyst
PS. Will be back next Tuesday, as Monday’s a public holiday here in Victoria.
