Dear Arnie -- you asked good questions, several of which I've been kicking around in my head too.
a) about the "low cost shares." Pharmos is/was thinly financed. I don't share the opinion that Castle Creek is the Darth Vader of all hedge funds simply because they made themselves a good deal, nor that Pharmos management was stupid or incompetent for making the deal. I've done a fair amount of 7-figure venture capital work as a consultant and feel certain the choice must have been to close up shop OR deal with a hedge fund like CC. PARS asset base is brains, not hardware, so no bank was going to loan them money. And venture capitalists often want a much bigger share of the business than what is implied by the potential conversion scenario in the C.C. deal. The net result for me is that I'm glad they gave us the money, otherwise we'd have no company now.
Oh, and most important -- remember that BOL was, to pun a phrase, "bowled over" by the simultaneous approval of Alrex when the FDA announced its decision. They and PARS had only expected a single drug approval. The Lotemax US market is only 2/5 the size of the Alrex market and would have been seen to be insufficient on its own to bring PARS to positive cash flow. It might be that management prepared a game plan in the raising of authorized shares, in other words, for a game that didn't develop -- we've got two drugs through instead of one.
In the conference call, CFO Bob Cook stated he thought the company might be able to stretch the survive time of its cash past the first quarter of 1999, which was targeted in previous releases as the last quarter the company would have adequate cash to fund the burn rate. How could he have implied the cash might now last longer unless he expects continued growth from Lotemax and Alrex?
b) with regard to the number of authorized shares, I think the number was made so the decision could be made once and not several times. Your comment that "management seems to have a penchant for dilution" must be taken in context of the nature of this business -- as said before, there are no bankers lending money to biotechs. If research takes a long time, what else can management do but sell additional shares?
Of course, one could speculate that the additional shares authorized give the company the option to acquire research for some other promising drug that fits the PARS mold. I think (certainly hope!) that management realizes its plate is full on what is currently underway, however, and would not seek out an acquisition at present or in the near term.
c) you mention short sellers in PARS being a bad omen and that there is some kind of "accuracy" to their involvement. Well, logic would side with the shorts in the past -- the track record of successful brain trauma drugs can be encapsulated in a single digit -- a zero. I can hardly blame them for feeling the odds favor a failure here too and shorting accordingly.
d) as to management's articulation of a long-term vision and strategy, I think it's there in subtle language in SEC documents, earnings releases and even in the web page.
For instance, a news release carries small print in italics at the bottom: <<Pharmos Corporation is a pharmaceutical company specializing in the modification of existing molecules through proprietary techniques to reduce undesirable side effects and/or enhance efficacy. >> I read here that the plan was and remains finding potential drugs and licensing them in early stage development, then doing the latter development with a goal of producing a product that is safer ("reduces undesirable side effects") and/or is better than what currently exists on the market. That the modification is to be through "proprietary techniques" says to be we're not trying to be volume producers/ knock-off suppliers of drugs already on the market.
It's also already apparent that the company will take a single idea and try to squeeze out as much "juice" from it as possible -- that the technology platform can be extended by different drugs, but also through the development of families of drugs. Thus, we have Lotemax, which begets Alrex, which begets (hopefully) LE-T. We hope to have HU-211 for brain trauma, which (hopefully) will beget HU-211 for the treatment of ulcerative colitis, which (hopefully) will beget HU-211 for the treatment/amelioration of soldiers/civilians exposed to nerve gas, which (hopefully) will beget HU-211 for the treatment/amelioration of sufferers of multiple sclerosis.
Anyhow, you get the picture and this post is growing to Biblical proportions , so there you have PARS, a stock with some warts and lots of potential.
Take care,
Ariella |
