6 December 2010
Bringing some festive cheer to Pharming’s balance sheet, Socius is providing net cash of €16.1m in a complex deal. Effectively, Socius gets €17.1m of equity with a 9.35% yield (paid in shares after four years). This resolves immediate funding issues and bridges the 2011-12 transition to a commercial company. Other (undisclosed) milestones, agreement and product supply and royalties are also expected.
Deal structure: A four-year delicate balancing act
The concept is that rather than issue equity at a discount, equity is issued at the closing price, €0.212. Socius’s upside is a nominal compound interest rate of c 10% over four years on €12m of Pharming loan notes yielding €5.5m. The interest is offset by a 0.65%, €17.1m Socius loan note: €0.4m interest. After four years, Pharming owes Socius €12.0m + €5.5m = €17.5m and Socius owes Pharming €17.1m + €0.4m = €17.5m. The net €5.1m interest is paid upfront in shares, corresponds to the warrant portion of the deal and is paid down via the P&L. Hence there is no hidden dilution.
Getting in the cash, putting out the shares
Socius’s actual cash investment is €16.1m; the extra €5.1m warrants pay the net interest. The Pharming 10% loan note of €12m to Socius covers part of this with the remaining €4.1m as a straight cash payment from Socius. Overall, once Socius has taken up its €21.2m of equity rights, it will hold 100m shares or 21.8% of the enlarged equity. The Yorkville SEDA facility remains, but management has no current intention to use it. Any additional project finance will be done using non-dilutive loans.
Runway to a 2012 commercial business
We expect the first Ruconest sales in the EU in December, although it will be a fine run thing; sobi, which recently changed its CEO, not exactly being dynamic. The BLA submission expected soon triggers a $5m Q111 milestone. Studies in transplantation (AMR) should start in Q111. Prophylactic data was very encouraging and this indication could be developed further as it is a big market.
Valuation:
Extra dilution moves indicative value to €0.64
Our risk-adjusted NPV falls to €0.64, cut by dilution but benefiting from lower cash interest charges. There should be no more major dilution events before 2012.
Update
Exhibit 1: Financials
Ruconest and Rhucin upfront payments (total €14.8m to date) are spread over 10 years, but cash was received in 2010. The sobi regulatory milestone is assumed to be fully recognised in 2010. We assume that the $5m (€3.8m) Santarus regulatory milestone in respect of BLA acceptance by the FDA will be received and fully recognised in Q111. The Socius funding (with €6m cash paid in 2010 and €10.1m due in early January) to complete early January) brings in €16.1m cash and increases creditors by €12m plus 10% interest and debtors by €17.1m plus 0.65% interest for €21.2m in equity. 2010 revenues include a €5m milestone. 2011 revenues include a $5m milestone. Upfront payments are accounted as deferred income.
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