Why is BNC down? 2012 trading in Canadian Biotechs is very different from 2011. I watch 9 small biotech stocks. In 2011, starting in March, all biotechs started selling off and it continued through much of the year. McRae used "industry sell-off" as an excuse in the fiscal 2011 annual report, although his company was down more than the average. In 2012, McRae is down a lot, but despite the fear of Greece and the Euro collapsing, the biotech industry has not yet sold off.
I noticed that the Biotech industry sells off about the same time as the US subprime debt index sells off. There is a graph of the index in the Financial Times on Feb 14 2012. It is uncanny. This index was sourced from Markit and Dealogic and is called ABX HE AAA Index. In 2012, subprime is only beginning to sell off now, although it is heavily shorted (again, per a recent article in Financial Times). The selling in biotech could begin soon if my index indicator is reliable. So why is Bioniche so early to the risk-off sell-off?
Here is my list of stocks to close of business yesterday. Percentages are change from 2011 low. S&P500 is +17% from its 2011 low.
- YM-T +74%
- NPC-T +61%
- ICO-X +55%
- RVX-T +48%
- EDAP-Q +42%
- CUR-T +36% (FDA approval received in Feb/2012)
- SDI-T +10% (slow signup for clinical trial)
- BNC -23%
- AEX -72% (clinical trial failure)
- Average of 9 stocks = +26%
Why has BNC sold off (early)? The question is really why has Anonymous been selling his big position. Only recently has UBS joined in. Penson (used by institutions) sold a lot to CIBC then bought them back a week later, so I will ignore that as likely tax planning. Not sure about the wash trading rule as it applies to institutions. Anonymous started selling on April 18th. They had a big buy order in on April 18 which got filled quickly at 60 cents. They then seemed to turn around on the same day and started selling. They are not selling to drive the price down. I have seen that before in CUR, so they could make a pass-through trade at an agreed price. No, in BNC they are careful to clear out all buyers at each price point, waiting before they move the price point down to the next level. This is a seller who wants to liquidate their position while minimizing their losses. Why sell at such low levels? I have two hypotheses:
- Fund manager retired or got replaced and the new fund manager wants to sell all his predecesor's holdings to avoid getting blamed. I ran into this in CUR. I couldn't find a fund selling, so it might also apply to private money managers. Maybe the rich person fired them and got a new advisor.
- Loan Default Risk. If BNC fails to stay ahead of a $3m/year revenue growth curve off fiscal 2012 actuals, then they are in default. In that case, the full $20m loan is immediately repayable. Plus a "Make-Whole Payment" is immediately payable equal to the sum of royalty rate times revenue for each of the remaining years of the agreement based on the forecast provided by BNC to the lenders at the time of the loan signing. BNC has assigned to the lenders all receivables from Endo (the $100m milestones) and given the lenders a royalty-free right to sublicence all the patents in the event of default. It is possible that in the event of default, the lenders would negotiate with Endo to sell the $100m milestones and the patent rights at a fire sale price to recover their cash.
How likely is it that BNC will default? I think it is unlikely, since they can cut their profit to increase sales if they get in a jam. Which is likely why "burn rate" cuts have now morphed into "burn rate management".
If anyone wants to find out how powerful and impatient lenders can be, particulary during a credit crisis like may be coming up with Greece and the Euro, go research Oilexco and their experience with Royal Bank of Scotland. It was ugly. I would have preferred to see McRae sell more shares. Shareholders cannot put a company out of business, no matter how angry they get. But lenders can.