Catalyst Pharmaceutical Partners (CPRX)

[bellweather1]

CPRX warrant/call values-

I did check my math. And although I didn't calculate the value of the warrants conventionally, a second look led me to essentially the same result.

Correct me if I’m wrong, but I assume you calculated the Black Scholes value of these warrants(essentially call options) with approx. the following parameters: 1.30 strike, 1.15 stock price, time(days)1825, vol%=10, risk free interest rate=8%

See: http://www.tradingtoday.com/black-scholes

You state that the value of the warrant(5 yr option, actually 5.5yr options) would be about $.30. –about what one gets with these assumptions and this calculator.
However, a quick look at how the marketplace really values options shows that this calculator is often flawed. Take Ariad, for example. Though not truly comparable, one would expect Ariad to exhibit less volatility,(but certainly no greater volatility), than a penny stock like cprx; and therefore, if anything, a lower call price.

However, using the same vol% and risk free interest parameters listed for cprx above, a 12 call of Jan 14 for Ariad would (by the Black Scholes method)be calculated to cost about $1.85, while the actual current price is $4.30.

At this ratio (4.30/1.85), the cost of a cprx warrant should be approx 4.30/1.85($.30)= $.70.

If you calculate the cprx warrant (call) value at the more accurate 5.5 yrs(2008 days), the value comes to $.3221, which results in a more real world value of 4.30/1.85($.3221)=$.75

What we’re looking for here is the value of a 5.5yr call option at about 13% over the face value of the issuance shares(1.30/1.15=1.13), which we’re forced to speculate, since these aren’t available in the market.

Another method to estimate this real world value, again using Ariad calls, would be as follows:

Since Ariad 12 calls(Jan 14=2.2yrs) are currently valued at $4.30, and Ariad 15calls(Jan 14) are at $3.40, an Ariad Jan14 call at about 13% above the approx current face value (of $12)=$13.50, would, if it existed, be priced about half way between these 2 prices; or at about $3.85.

I think we can further imagine that if 5.5yr $13.5calls were available for Ariad, they would cost something like 5.5yrs/2.2yrs(or 2.5x as much(or 2.5x$3.85=$9.63).

Assuming that CPRX calls would be worth a little less, if these were, for the sake of discussion, selling at $9/call, their value would be $9/$12, or 67% of the approx. face value of an issued share.

Applying this valuation method to CPRX shares, .67x $1.15=$.77/warrant.

Since this warrant is included in the price of 2 shares($2.30), it has to be considered a discount from the price of those shares.

Therefore, the actual cost of 2 shares in the current offering is approximately 2x$1.15=$2.30-$.77(discount)=$1.53.

As such, the cost of one offering share is still approx. 1.53/2=.$.77.

So, as it turns out, though the value of the warranted share isn’t technically free, the effective discount(of $.75-$.77/share) from the price of the issuance shares is large enough that it might as well be.

Therefore, I believe my estimate, despite the alternate routes, was pretty accurate.

BTW, I don't expect the price to get anywhere near $.77 and I'm continuing to accumulate here.

Regards,

bw