Replies to post #144643 on Avid Bioservices Inc (CDMO)

[revenue_monster]

Nice write up RR. Spot on with your comments

[biopharm]

RRdog... I think its a tough subject re: ATM vs. loan vs. selling part of the IP vs. (what you mentioned) sell/lease Avid with option to buyback. That Avid sell/lease back is interesting and if they could work it out where its a trusted 3rd party it "could" work but I doubt it only because of all the opposition against Peregrine. I wouldn't want "any" 3rd party knowing the production "real time" current production going on or Avid customers or be in any position to have any insight into Peregrines plans than needed. An example would be even the "transfer agent" that needed to be changed.

I may be overly cautious and skeptic of anyone dealing with Peregrine... but thats what Fargo like trials makes one (at least me) think.

Back to the ATM dilution: thats a argument that can be debated on both sides and hope a partnership soon will place all the dilution concerns to sleep. I just can't wait for the day that CEO Steve King tells us once again that they are moving away from the ATM and no longer need to use it.

Another side of the issue is where are the ATM shares going? ... which may be best for shareholders to allow that shift in ownership if indeed some "family" or group or entity had a high ownership of shares that would place the poison pill at risk in the future.

I hope you do post more often, even if it does mean you disagree because you can give another side of the argument and may change peoples way of thinking. On most all cases I think you are absolutely correct... just I think Peregrine feels they have something in "PS targeting" that they feel is worth much more than many think and many things are happening with Peregrine that I see in no other biotech stock from 1) strong opposition 2) no early partnering in phase I 3) Fargo like trials 4) The passing of Dr. Thorpe 5) transfer agent change 6) ...all this while we have complete silence from the company and 5) Federal Authorities involved at how many levels .... ?

My gut feeling tells me that they do have what every Big Pharma wants.

[mrpatinmn]

Nice analysis Mr. RR. There are a great many longs here that are in total denial of the upcoming "Diluthion" as coined by our eminent poster Sir GJH.

[stoneroad]

Economics 101.

[md1225]

Nice post thank you RRdog!

[Bungler]

Fair enough. I will just make a couple of additional observations. As we saw with Oxford Financial, unless there is significant collateralization of a loan, the slightest misstep will result in declaration of a default. I would rather ATM than mortgage the IP.

Second, let us assume your hypothetical that the ultimate value for PPHM is 5 billion dollars. A year ago at 100mm shares in the cap you would have gotten $50 a share for your holdings. Today, at 156mm share cap, you would get approx $32. However, suppose that PPHM did conclude a partnering deal instead of selling the 56 million additional shares. Your scenario assumes that the partner will receive nothing in return for the deal. In fact, the partner is going to demand a large share of the potential value. If the partner wants a 50-50 deal, that means the ultimate value would be only 2.5 billion with a deal instead of 5 billion "go-it-alone." So, your shares would be worth only $25 with the partner deal, vs. $32 with the additional shares.

[eastcoastguy]

Well reasoned anti-ATM position RRdog. ATM should only be used by those companies that have no other way to finance. As you have shown dilution is very expensive in the end. Probably one of the reasons management keeps lathering themselves in options. They need more shares to keep up with the dilution. I kept pace with the dilution for awhile but threw in the towel and will win or lose with the shares I own.

Look at the SP after PPHM announced the 30M loan facility in 2012. It signaled to WS that the dilution was over. The SP moved up smartly after that.

The low hanging financing to me is leveraging the value of AVID's revenue. I'm very surprised we haven't at least set up a LOC against AVID. And don't tell me it puts the IP at risk. Its one of the reasons I've hit the pause button on buying more shares. If PPHM is not confident enough to enter into a loan agreement and pay interest (at historically low levels) I wonder why? To sell shares at 1.40 sends the wrong message not only to many of us but to WS where the shorts can play without fear. They know there will always be an abundance of shares to cover with.

I'd like to see a front line Chief Financial Officer brought in. Someone like Greg Shiffman who is soon leaving DNDN.

be well,
eastcoastguy

[bidrite]

RRdog, respectfully the assertion in your example, while the math is accurate, assumes that the value offered before and after dilution is the same. Running the risk of answering for CP and Bungler, I believe they are inferring that the funds collected by the ATM are being used to increase the final value. So in your example prior to ATM usage $2b/156mm shares = $12.82, rather than lets say $1b/100mm shares a year ago = $10/share. Of course this is a made up example.

Unfortunately none of us can know 100% for sure if the intrinsic value of a final deal is greater than the dilution. Objectively speaking, one could infer that as the risks are removed the price to partner increases exponentially higher than the cost of removing the risks. Such as eliminating going concern and FDA PHIII approval. In this sense I agree with CP and Bungler that our price to partner greatly surpasses the additional dilution. The same can be said by doing PHIII alone, IF we get final approval.

With all that said I absolutely agree that we should have pursued a partner for Cotara to help offset some of the costs in bringing it to PHIII. The excuse of it being a niche product is completely unacceptable since we have known this from the beginning. Who cares if we have to do a "less-than-stellar" deal for Cotara...just get it done. The focus is, and has been, on getting 2nd line lung to market. That will bring us the big $$ from a partner.

I also agree we could be leveraging Avid for a loan or LOC. It was reassuring to hear during the last CC an analyst asked the question if management would consider it. The answer was yes, they are/would consider using Avid to secure financing.

[Protector]

RRDog, your post is structural and well argued as usual. I can agree with many things in it, certainly some of your very creative propositions as ATM alternatives. Then I also read Bunglers post and one of the concerns I may share with him is the collateral thing.

I will try to express my concerns around a loan and extend my statement that it is therefore that I prefer the ATM to: it is therefore that I prefer ANOTHER financing vehicle (which includes the ATM but is not restricted to it).

At the risk of repeating myself (again):

1) My biggest concern is that loan terms exclude the issuance of shares in any form. The poison pill mechanism is based on issuance of shares on BoD/management activation. I do not want to poison pill to be disabled and certainly not management being dependent on an authorization of a banker/financier to activate it. In this corrupt BP/Finance world ties lead all ways and a BP can easily put some pressure on a banker.

2) The IP or pipeline as a collateral is scary. We had that with previous loan and i would like it to remain unencumbered. PPHM must now, more then ever, have its hands free to negotiate prices and conditions and we should avoid PPHM having to present a negotiated deal to a banker for agreement, which is a source of leak because the banker people know what is coming.

3) A loan must be paid back, plus interest and often other advantages given to the banker as we saw with Oxford. ATM money is cheap BUT before all doesn't create any stress at pay-back terms. What if PPHM has a payment to do and didn't raise the money (say from Avid) to do pay it? If we would have a stronger ongoing business that would be less a problem but now it is, IMO. At such moment the collateral becomes at risk.

4) A loan comes with many other terms and we saw in September 2012 that bankers don't hesitate to trigger the alarm bell without talking or negotiation and ask there loan back. What if PPHM wouldn't have had the ATM to raise the money? The bankers FORCED us to do it in the FULL drop of the pps at worst prices! They are no partners, but a club of sharks. Always better not to swim in their waters.

I never understood why in the US bankers forbid a party to get another loan from another banker, sell ATM, etc. Over here a loan is an amount to pay back in a given term at a certain interest with a possible collateral depending on how solid your company is and what you ask the loan for. From where I stand the bankers main profit comes from the handle they have on you when you can't pay back. That is why they close all other doors. Maybe PPHM should look for loans in Europe.


As for your example.

Let's use a more "real world" example since long term and long suffering shareholders in PPHM are in this for the big hit. Supposing the ultimate value for PPHM is 5 billion dollars. A year ago at 100mm shares in the cap you would have gotten $50 a share for your holdings. Today, at 156mm share cap, you would get approx $32/ share for that same IP. Quite a difference. At 200mm sh cap you get $25/ share for your smashing success and at 300 mm share cap you get $16.66/share. That is some whopping difference on the back end and the "back end" is what most knowlegable shareholders are here for.

I see what you say but the example, as far as I understand it, should have mentioned the value of PPHM 1 year ago and Today, not assuming it is in both case 5 billion dollars.

If PPHM was worth 50$ five years ago based on a 5 Billion dollar worth estimate then today with a PIII Cotara, PIII Bavi NSCLC, the ASCO results and Avid's performance the company cannot be worth also 5 Billion Dollars, IMO. No more going concern, no more loan, a new patent in June, etc. I know the 5 Billion is only an example and that you did never make a claim on PPHM's real value. Hence I will not say it is worth 7.8 Billion Dollar today, which is the value needed for the shares to remain worth 50$ in stead of 32$ after ATM issuance.

Then add to that Bungler's argument
in this and this post and it is clear that there is something to say for both ATM and NO ATM.

But RRDog, you will NOT hear me say that the one or the other is the correct solution. Both are strategies and both have their advantages and disadvantages. So my supporting of the ATM is more based on personal choice/preferences of type of risk/dilution profile.

PERSONALLY (me) I prefer some possible voting power and coupon dilution and reduce the risk involved with a loan. Now this being said, I think we may see a new loan in the near future but with larger parties then Oxford.

Oh, an I enjoy your and Bunglers post, and several others, also, even if we don't agree, which I think is constructive to develop a good discussion.

[until2000]

I for one am happy to see that you still care enough about this company to
participate in this discussion.

You share a professional perspective that adds so much to my own appreciation
of the trials and decisions necessary for a biotech to generate value for their shareholders.

Thank you.

[hayward]

Rdog

I agree with what you say EXCEPT for this part because if the IP is currently worth 2 billion that would have to increase or decrease after 3-5 years of more testing because at that point it would be proven to work or not. Also with early look in the PPS will certainty move one way or another prior to 3-5 years so you cannot use the same market cap fictional or not in this example

Michael

Under this scenario, most shareholders would do pretty well if this 2 B deal were cut today. However, if it takes a long time to get there and PPHM has to go the very expensive route of PH3 on their own, then shareholders may not do as well. If , for clarity of example, it takes another 3-4 years and PPHM continues with the self defeating ATM and gets to the 2B valuation but now has 312 mm shares, then each shareholder would only get $6.41 cents for each of their shares and that is not nearly so good.

[hayward]

Rdog

I agree with what you say EXCEPT for this part because if the IP is currently worth 2 billion that would have to increase or decrease after 3-5 years of more testing because at that point it would be proven to work or not. Also with early look in the PPS will certainty move one way or another prior to 3-5 years so you cannot use the same market cap fictional or not in this example

Michael

Under this scenario, most shareholders would do pretty well if this 2 B deal were cut today. However, if it takes a long time to get there and PPHM has to go the very expensive route of PH3 on their own, then shareholders may not do as well. If , for clarity of example, it takes another 3-4 years and PPHM continues with the self defeating ATM and gets to the 2B valuation but now has 312 mm shares, then each shareholder would only get $6.41 cents for each of their shares and that is not nearly so good.