today's australian

Prima risks the dark side

THE team at Prima Biomed -- the Lucy Turnbull-backed cancer vaccine developer -- is pretty chuffed about its $25.5m funding deal with US investor SpringTree Special Opportunities Fund.

Shares soared when the deal was announced earlier this week, and again yesterday, making the company one of the better-performing stocks in the biotechnology sector over the past year.

However, several market players have pointed out the dark side of convertible notes as a fund-raising tool, including the opportunity they can provide for the noteholders to short the stock in question.

Marc Sinatra, an analyst with Biotech Daily, says convertible notes can be dressed up to look like just about anything.

"In their nastiest form the noteholder can use them as part of a profitable short-selling strategy and/or to capture a greater slice of the company," he wrote in a note to subscribers.

"In a more appropriate form they can be used by biotech companies to obtain significant amounts of working capital where the level of risk makes finding equity investment difficult."

On the plus side of the arrangement between Prima and SpringTree, no interest payments apply, the cash will trickle in monthly and Prima can opt to repay the debt in cash rather than shares.

However, on the downside, according to Sinatra, the equation for converting the notes into shares has handed most of the upside to the noteholder.

Plus, there's a risk that many of the shares issued might wind up back in the market.

"Although ... management has the company up and running again, any selling by SpringTree of its shares is likely to cap Prima's share price around its current," Sinatra said.

Or worse. As one funds manager put it: "Remember Chemeq?" Ah, the animal health drug company that imploded after issuing $60m of convertible bonds to a Japanese bank. No doubt Prima has plenty of safeguards in place to prevent such a calamity.

http://www.theaustralian.news.com.au/business/story/0,28124,25825640-30538,00.html