Friday, June 18, 2010

Javelin Pharmaceutical (JAV US) AMEX

I'll do a lengthy write up on a firm I have been following in the US. It will not be in the usual format since this firm is not a buy for operations story but more of market action play.
  • Specialty pharma focusing on pain management 
  • Currently US$1.42 * 67.8m = US$91.99m 
  • 1 marketed product Dyloject in Europe
    • Submitted US New Drug Application (NDA) Dyloject formal review accepted
    • 2 drug candidates in Phase III clinical development: READ HERE 
      • Ereska (intranasal ketamine) and 
      • Rylomine (intranasal morphine)
  • 6 Aug 2009 
    • Unamed European pharma gave prelim interest
    • Stock exchange worth US$2.20 / sh
    • This was not disclosed till 12 Feb 2010
  • 30 Aug 2009
    • Separate firm offered US$2.47 / sh stock swap
    • Revised from previous $2 / sh offered on 7 Aug 2009 
  • 10 Dec 2009 
    • Another firm gave US$ 2 / sh in cash but JAV rejected due to lack of financing facilities and insufficient due diliegence 
  • 18 Dec 2009 
    • Myriad Pharma agrees to takeover JAV (0.282 MYRX sh per JAV)
    • 22% over previous close of US$1.50 
    • Ratio will decrease as the FDA approval date for Dyloject stretches out 
    • US$6m of working capital financing was provided by 1Q2010 by MYRX prior to deal close
  • 3 Mar 2010 
    • Millenium mgmt, owns 7% of JAV reject MYRX offer, JAV price down 
  • 12 Apr 2010 
    • Hospira (HSP) offers US$2.20 / sh in cash 
    • Working capital will be provided by HSC to JAV 
      • US$4.5m for operations 
      • US$8.3m for repayment of working facilities from MYRX 
      • US$4.4m termination fee 
    • Announced 5 day period for MYRX to better the offer, if not to proceed with HSP offer
    • JAV price up 60% to US$2.15 and MYRX up 10% 
  • 19 Apr 2010 
    • Terminate offer with MYRX 
  • 19 May 2010
    • HSP extended offer to June 2 after 79% of shares tendered 
    • extended based on "not all conditions met"
    • UK supply issue for Dyloject was brought up, JAV down 17% 
  • 24 May 2010 
    • White particulate found in Dyloject in Europe, reported to DMRC+MHRA 
    • Stock down another 30% at US$1.26, gross spread at 76% 
  • 3 June 2010
    • JAV filed suit (Delaware) against HSP (to payup for tendered shares and complete the takeover, expediting process for trials) and a US$ 2 mil loan on June 1
    • HSP extened offer from June 3 to 16 
    • HSP counsel mentioned drug recall could result in "Material Adverse Effect" (MAC) defined in the merger agreement since it is the sole product online for the firm. Onus will be for the claimant (HSP) to prove the facts and is not easy to invoke
    • There is a forward-looking element of “reasonably be expected to result” in the closing condition later in the merger agreement. Moreover, there are exclusions to this M.A.C. definition, but none appear applicable
    • The M.A.C. is not defined to include any material adverse change in Javelin’s prospects and only includes a less demanding forward-looking element. READ HERE
  • 4 June 2010 
    •  Court granted the motion to expedite the process 
    • NYSE informed JAV of going concern risks and may violate NYSE rules 
  • 11 June 2010 
    • JAV announced US$2mn loan from HSP extended 

OTHER FACTS (certain facts from Seeking Alpha)
  1. HSP CEO publicly stated he likes the product at the Sanford C. Bernstein's 26th Annual Strategic Decisions Conference 2010 on June 2nd, one day before the second extension
  2. Dyloject on markets since 2007, its a new formulation of an 30 yr old generic drug Dicoflenac. Its a non-steroidal anti-inflammatory drug (NSAID)
    • Favorable alternative to Keterolac, the only NSAID drug out there with a black box warning and US$300m in sales each year. (Source:
  3. HSP core business is in drug delivery and less so of drugs itself 
  4. HSP is buying Dyloject mainly for US and potential pipelines
  5. Issue in Europe is mainly the drug from the JV of Therabel and JAV
  6. JAV insistent of a financing facility shows their weak financial position
  7. Ereska and Rylomine both in favourable phase III trials 
    • Ereska has strong military application with Dept of Defense forking out US$4mn for research 
    • Rylomine put on the backburner to sloe cash burn 
  • As of May 2010, JAV has US$ 1.63 mn cash, total debt of US$ 6.3 mn and equity negative US$13.4mn 
  • Sales revenue of US$4.8mn in 2009 is solely from Europe operations
  • Cash burn ranged from US$30 - 40mn p.a
  • Firm has financed this with raising cash from exercising of stock options
  • Cumulative R&D expense for the 3 drugs Dyloject, Ereska and Rylomine stands at US$111.3mn and  is $61.2, $31.1 and $19.0 mn respectively from the SEC filings HERE
  • Pain management drug market will hit US$40 bn
  • Issue is with distribution, not the drug itself (which is what HSP is buying for - THE DRUG!)
  • The risks are not low. Interesting to look into this one
  • JAV is definitely worth more than the current price of US$91mn but how much more?
    • Downside is limited based on past price ranges, however there is a risk of it going lower due to deterioration of the financial position of JAV
  • I would expect either
    1. HPS walks away from the deal
      • need to prove M.A.C (difficult) and recall of drug is isolated to the Europe delivery and likely not to be the drug issue since it was tested and proven safe
      • JAV likely to chase after HPS 
    2. HPS offers again but lowers price 
      • Depends on JAV reaction, not likely after the immediate legal action by JAV after HPS tried to pull out earlier in June.  Guess JAV management understands the firm is fairly undervalued from the exercising of stock options recently and deferring their compensation
    3. HPS takes the current offer at current price 
      • Proving M.A.C fails and after all HPS needs JAV drugs 
    4. 3rd party comes in with higher offer than HPS
      • Given the efficacy and relative safety of the drug, low cash position, low market cap, late stage pipeline, remoteness of the Europe event
So as one can observe, there still is quite a good chance #3 and #4 will happen and therein lies a considerable amount of upside for JAV. Its price before the whole action started was US$1.50 and now it is US$1.42 and this the historical low of the stock since long time ago, yet current situation of the firm (less the financials) looks very promising.

Disclaimer: No position in JAV

Monday, June 14, 2010

Fujian Zhenyun FZY (SIN: 5KT)

This S chip recently had a auditor expressed disclaimer of opinion. (I.e, auditors cant verify the numbers). The point of contention was a RMB 36.6mil that was transferred from receivables to prepayment of deposits. Sounds familiar?

Now this firm had cash of RMB 185 mil and yet had debt of RMB 13.4 mil. Total receivables grew 29% yoy and inventory grew 15% even when sales was rather flat at 2.8%.  I was not able to spot any problems with revenue and expense recognition, any off balance sheet or capitalized items. The financials excluding the observed trends have been decent and cash flows were in fact appearing safe and recurring.

Besides the above, FZY also had regular dividends from 2008 with a current dividend yield of 2.9% at $0.38 stock price. The dividend have been postponed from 15 June to July. The price have since fell to $0.24 this morning.

It is best to stay away from this counter until the doubts have cleared in the postponed AGM.


Thursday, June 10, 2010

Sinomem (SIN: S14)

After much review, I still cannot understand why people regard Sinomem as a good investment. The firm's founder being from NUS and now a Singapore citizen mitigates any risk? That is highly doubtful.

It is to be reminded that profits are just numbers until they can flow down to the cash flows. One should truly stay clear of companies like China Sports (SIN:FQ8) who are net cash but yet raises rights. Always check the numbers and uses for the cash.

Anyone who has an enlightened view or a different opinion on this counter, please contact me and I will be more than happy for a discussion.


Wednesday, June 2, 2010

BP oil spill debacle - part 2

Now it seems that BP is not too cheap given the more in depth research done after my first post. With both a legal probe and a criminal probe, this counter is likely to go even lower. Now an estimated 12 -19 kboe are leaking from the well, much more from previous 5 kboe estimates. Valdez spilled 260 kboe and spend US$ 2 bn in clean up, US$1 bn in civil and criminal charges and US$0.7 bn in damages totalling approx US$3.7bn.

For BP, it has been 43 days since the spill, estimated 516 - 817 kboe spilt in the Gulf, about 2-3x effect of Valdez. Total cost will run up to around US$3.7 *2-3 = US$ 7.4 - 11.1 bn (No FV) and approx US$ 11 - 16.5 (FV 20 years).
The decline has cut about £40bn from BP's market capitalization. 
  • Oil Pollution Act caps damages to US$75 mil, however judging Obama's response, the cap may well be out of the window back to the former US$ 10 bn cap, BP will pay US$ 6.5 bn as they own 65% of the well. 
  • So total compensation to pay will be US$ 17.5 - 23 bn 
  • Do not forget that other oil majors and general market fell 10-15% over the same period 
  • Excluding the spill, BP ought to have only lost around £10-15 bn of market cap 
  • Taking that into account, current price is estimating spill costs to be £25-30 bn
  • BP has operating cashflow of US$27.7bn in 2009, with debt to equity 19%, US$10.4 bn in dividends and US$ 20 bn in capital
Efforts to plug the well with mud, termed "Top Kill" failed to kill anything and now plans to cut and install a new riser to bring the oil to a new containment vessel. There has also been news of BP making a third of the Gulf waters unfit for fishing, compensation will be very very costly. Insurance covers only current losses (equipment etc) not future earnings.

Other stocks related to Deepwater Horizon well got hammered. 
(Price fall today / since April 20)
  • Transocean Ltd. (NYSE: RIG)           12% / 46%  (Owner of deepwater Horizon Rig)
  • Anadarko Petroleum (NYSE: APC)    20% / 43%  (25% stake in the well) 
  • Halliburton (NYSE: HAL)                   15% / 36%  (Crew involved in plugging the well)
  • Cameron International (NYSE: CAM)  12% / 31%  (Made the well blowout preventer)
  • BP (LON: BP)                                  13% / 34%  (The worst of everything all in one)
This compares to FTSE drop of 11%.
While the fall in price of BP is severe, any further failures, additional probes and lawsuits pending, loss of lives, loss of jobs, hiring cleanup crew etc will continue to add up to the cost tally. It is a 2 leg variable and increases exponentially with each passing day. Furthermore, it is noted BP has a long history of compromising safety with poor equipment and relatively unskilled workers. I do not think to jump in now and invest in a firm with management of a doubtful integrity will be the most prudent thing now, given that there is little upside from the costs and figures may run higher. (numbers I gave are approximate and such lawsuits go on for several decades).

Tuesday, June 1, 2010

Portfolio report for 1H 2010

1H 2010 was packed with much activities, mostly macro economic happenings.
I was spending an abnormally large amount if time trying to find means to expand ways to execute my ideas. My main concern with equities and across the board inflation still lies the same as prior months. It seems there may lie a period of low returns from equities in the near future.

31 May 2010 Portfolio details 
  • 78.6% cash position, dividends added approx 8.0% 
  • Total 4 equities positions 
  • Biggest loser was Roxy which is approx 3.6% of portfolio
  • Biggest gainer is an investment holding firm which has yielded good dividends 14.9% of portfolio
  • Portfolio performance is flat versus a decline in STI of 5% 
I included the STI for relative comparison and the relative out performance is meaningless if we are to look at absolute performance. Roxy remains firmly undervalued in my view with assets far over their current market cap, even excluding the development projects. I suppose people are shunning it for their lack of stable dividends and understanding of their hotel cum development businesses.

The investment holding firm was bought on a basis of low price to book with cheap operations and I will update upon exiting the position. The last position is in a traditional manufacturer with a large cash position and recurring cash flows.   

The portfolio was started around late March and I am definitely not satisfied with the performance even though the short span of time. I look forward to focus my efforts to investments after I have settled the various miscellaneous activities currently ongoing.

Lion Asiapac was not included in the portfolio as it was purchased prior to the setting up of the blog.