BIO-GUIDE: IF MARC SINATRA WAS KING OF CIRCADIAN
August 24th 2008 06:51
Friday August 22, 2008
Daily news on ASX-listed biotechnology companies
* ASX UP, BIOTECHS DOWN: LABTECH UP 21%, LIVING CELL DOWN 11%
* BIO-GUIDE: IF MARC SINATRA WAS KING OF CIRCADIAN
* CIRCADIAN BECOMES A BIOTECH: $2.3m LOSS REPLACES $6.3m PROFIT
* SIRTEX SEEKS URGENT RESTRAINT OF FOUNDER DR BRUCE GRAY
* PROGEN APPOINTS BEERWORTH CORPORATE ADVISOR
* BARCLAYS CEASES SUBSTANTIAL IN CSL
* HUNTER HALL INCREASES TO 11% OF BIOTA
* BIOPROSPECT: SOLAGRAN COMPOUND GOOD FOR HORSE ULCERS
* AGENIX APPOINTS NICHOLAS WESTON CHAIR
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MARC SINATRA’S BIOGUIDE: CIRCADIAN
At a market capitalization of $43 million, Circadian is trading at a discount of 27 percent to its cash and listed investments of $59 million.
This values Circadian’s unlisted technologies, including the $8 million Vegenics intellectual property alone, at a total value of zero. So a probable $20 million is valued at $0.00.
Clearly, Circadian needs to unlock this value for its shareholders. At the same time it would present a clean company like Chemgenex has become and Acrux always was, that is attractive to ordinary investors as well as potential high net worth corporate suitors.
Its current strategy to do this is a mix of drug development and out-licencing based on its Vegenics assets with its $46 million cash and the eventual sale of its other assets, when market sentiment returns, to finance these activities.
I believe an alternate strategy could accelerate the unlocking of this value, gain market recognition for the value of the unlisted assets and leave Circadian in a better position as a successful drug development company.
Central to this strategy is making Circadian look like a drug company, so the market values it as one. The ‘new’ Circadian looks like the old biotech incubator it once was, with a few new managers and committees. Hence it still attracts a discount.
Since Circadian has the core of a drug development company, this exercise is principally about stripping away assets that are surplus to its needs.
Circadian’s holdings in Antisense, Avexa and Optiscan, collectively valued at $13 million, serve no strategic purpose, while Circadian’s unlisted technologies, such as Dicarba Analogues and Syngene, are not compatible with Circadian’s main anti-cancer technologies. Moreover, Circadian no longer has executives to actively manage these assets. The assets need to go.
Given that Circadian’s lead candidate has just entered preclinical testing, its $46 million in cash is more than it needs.
Companies - like people - tend to live within their means. You don’t really need that holiday home in the south of France do you, but if you have the cash, why not? For companies, it is even easier for managers to spend the cash, because it isn’t theirs and limiting it forces them to focus on what really needs to be done.
Circadian says its cash burn will be between $10-12 million annually and since it has enough to focus on without in-licencing or buying additional technology no additional money should be needed for these activities, so I am inclined to leave it with three years of cash or $36 million. So $10 million can be cleaved from the company.
Some will argue it doesn’t make sense to take away money they may need later, but I argue that capital raisings are a true test of a company’s competence. Even in this so-called credit crunch year Heartware has raised $31 million and Peplin raised $24 million.
But there are other reasons for reducing Circadian’s cash balance.
Having decided to strip the excess assets, the question is what to do with them? The obvious answer is: Give them back to shareholders.
Selling Circadian’s stakes in Avexa, Antisense and Optiscan would have to be done at a significant discount at the moment and would wreak havoc on the share prices of those companies if sold on-market.
The best option is to transfer title of these shares directly to Circadian shareholders, who could keep or sell them and provide compensation for those with unmarketable parcels.
Dealing with the cash is easy: shareholders get a cheque proportional to their holding.
The remaining unlisted assets need to be sold or dumped.
The excess assets have one value within Circadian, but a higher value in shareholders’ hands. This is due to the discount mentioned above.
An example of what can happen when assets are given back to shareholders is provided by the old Circadian.
In 2004, Circadian announced a capital return of 50 cents per $1.82 share. After this announcement, the stock opened at $1.88 and finished the day at $1.92. In that case, giving away money increased the value of the stock.
When the stock went ex-dividend, the price went from $2.02 to $2.31 when it should have fallen by the 50 cents dividend. Too much shouldn’t be read into this, but it does show pulling money out of a company can be done without an equal fall in share price.
The net result of this capital return was a higher valuation of the company’s assets.
Ideally, this excess asset stripping exercise should leave the new Circadian with a market capitalization of $44 ($36 million cash plus $8 million in Vegenics IP) with at least $23 million ($13 million in shares and $10 million cash) in excess assets going back to shareholders.
So shareholders could have up to $67 million in assets after the restructure as opposed to the $43 million they have by owning Circadian shares.
Circadian is a well recognized brand; it’s also synonymous with its listed investment fund and incubator history and its name needs to change to make the break from this image.
A road show will be needed to convince the market Circadian has changed and to prick investor interest. These extra steps will help Circadian become more accurately valued.
This has been a hard piece to write. The issues in restructuring a company like Circadian are complex and the principles often counter-intuitive. I believe strongly that the plan I have outlined would be beneficial to shareholders, but as an outsider, there are always things I don’t know. For any plan to work, these also need to be considered.
Marc Sinatra owns shares in Circadian Technologies
Circadian was up five cents or 5.56 percent to 95 cents.
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