Biotech Values

[DewDiligence]

Today’s GTCB financing (update and elaboration):

I’m disappointed that GTC is raising cash at all prior to the expected EMEA opinion in February, and I have to infer that GTC is somewhat less confident about the EMEA review than I had thought. GTC already had enough cash to last well beyond the expected EMEA opinion date, so they presumably would not have financed now if they thought a timely ATryn approval were a sure thing.

Moreover, I do not think we can assume that the investors who bought the shares and warrants in today’s offering are supremely bullish about GTC’s prospects. Although the new warrants are not exercisable until June 13, 2006, the new common shares may be sold at any time (and some of them could even have been used to cover pre-existing short positions). Thus, I consider the fact that institutional investors put money into GTCB shares and warrants to be bullish but not hugely so. On balance, I think this bullish signal is outweighed by the bearish signal from the company’s willingness to raise capital now, although I admit that this tradeoff is not clear-cut.

The actual terms of the financing were reasonably good for the company due to the pre-existing shelf registration, which allowed GTC to do a market-price, registered deal rather than a discounted (unregistered) PIPE. Although the deal includes warrants at the rate of 0.4 warrants per issued common share, the warrants were not given away for free; rather, investors paid $0.125 per warrant, which comes to $0.05 per issued common share/warrant unit after adjusting for the 0.4 ratio of warrants to common shares. Thus, GTC raised $1.83 (1.78+0.05) for each unit of 1.0 common shares and 0.4 warrants issued in today's transaction.

After today’s deal, GTC has cash on hand in the $35-40M range (before burn during the current quarter), which is surely enough to last through all of 2006 and beyond. (If the new warrants are eventually exercised, they will bring in an additional $7.5M.) Hence, I think it’s safe to conclude that today’s financing will be the last one before the EMEA’s ATryn opinion is rendered. This ought to be a boon to buying by investors who like the company’s prospects but have been sitting on the sidelines due to fear of a dilutive financing.

After today’s deal, there are approximately 61M basic shares outstanding and 72M shares on a fully-diluted basis (including all options and warrants).

The 72M fully-diluted share count is a 21% increase from the fully-diluted count before today’s deal, and therein lies the biggest negative of the deal. With so many more shares, it will be harder to realize the kind of huge share-price increase if things go well that is the reason for investing in the first place.

For example, a $200M market cap, which I consider a rock-bottom figure for what one might expect after the approval of ATryn in Europe, translates into $2.80 per fully-diluted share. A $300 market cap, perhaps a more reasonable value after an ATryn approval, equates to $4.20 per fully-diluted share. A $400M cap, still not an excessive post-approval valuation, equates to $5.50 per fully-diluted share. In short, the upside is more subdued than it was before the series of financings during the past couple of years, but an impressive upside potential is still present. Dew

p.s. The valuation arithmetic above is based on fully-diluted market cap rather than fully-diluted enterprise value (market cap adjusted for cash and debt) because GTC’s credit line and conditional debt payable to GENZ roughly offset its cash balance, and hence the two calculation methods produce almost identical results.

p.p.s. I think the notion that GENZ is out to control GTC in some manner can now be put to rest—permanently. Unless GENZ was one of the buyers in today’s offering, which is highly unlikely, GENZ’s equity stake in GTC is now only 7% on a fully-diluted basis.