A favorable deal -- soon – gets my vote for the overwhelmingly most-likely scenario. Going solo is not possible, IMO, when you run the numbers and evaluate different capital structure scenarios; that’s what my analysis is telling me.
Fortunately, the probability of a favorable partner and/or license deal jumped exponentially with the Oxford loan. It's an inflection point. Three highly unusual, non-market conditions stick out about the "loan":
1. The $30M "loan" was made to a company with negative $41M of EBITDA in FY 2012. [EBITDA is earnings before interest, taxes, depreciation and amortization -- a proxy for cash flow in finance]. This is unusual, right off the bat.
2. The collateral package has a Net Orderly Liquidation Value in the neighborhood of only, say, $5M, by my estimation, applying market approximations to PPHM's book values. Even if this is grossly low (which I don’t believe to be the case, based on experience), it still won't alter the fact that secured lenders do not commit $30M against $5M, give or take, of NOLV asset protection. The loan-to-value gap is not even remotely in the right ballpark for normal underwriting. Not even in the right city.
3. The collateral package excludes PPHM's Intellectual Property. The IP has been left unencumbered, obviously on purpose, to avoid muddying the partnering or licensing path(s); and, notably (actually, shockingly), the lenders were OK! Excluding IP just doesn't happen in a normal, secured lending environment. But this is not a normal environment. The loan has almost certainly been integrated with other events/planning that are being foreshadowed.
Where's all of this going? Taken together, Oxford needs an alternative source of repayment – i.e., a favorable PPHM deal -- to provide an exit strategy. And, sooner rather than later so that Oxford can generate the equity-like returns needed to compensate for the equity-like risk they have taken. Time affects ROI.
My conclusions: There's a transformational deal ahead. PPHM has bought some time to negotiate better deal terms, but not to go solo. Management/BOD can still fumble the ball, but for now they seem to be breaking to the goal line. I’m long, and have been steadily accumulating because virtually any deal will be favorable for equity valuation purposes. SK, please, please just don’t drop the damn ball!
AI
