This is pretty naive scaremongering, but thanks for your concern.
You don't directly accuse NovaQuest of selling, nor do you say that Bell Potter has the line to sell, but you throw around doubt. You say not to be surprised if the short interest rises, knowing that implies shorting will push the price lower. I'm sure you wouldn't want to frighten people into repenting and selling and I'm sure you do it with love, but the way you word it will undoubtedly scare some of those who don't understand what voluntary escrow means.
1. Details of the NovaQuest debt and equity deal and why they are highly unlikely to sell their shares
NovaQuest (NQ) took a placement of MSB shares on 10 July 2018 as part of a long term financial partnering and funding deal with MSB.
To show that they were happy to be longer term holders of stock they undertook not to sell any of those shares for 12 months. That is called a voluntary escrow and is entirely normal in these circumstances. It is often enforced by a broking firm in big capital raisings so that instos feel safe that they can take shares and a big holder won't suddenly dump them. In fact, I am aware of several occurrences where the "voluntary" escrow has been released by the broking firm well before the time period has elapsed - ie it is voluntary. I am sure as a major lender, with more money to be lent, that NQ could have had the voluntary escrow released before the 12 months was up if they had wanted to sell.
The fact is, it doesn't make sense to sell - they took the stock at 5% premium price to the Australian 10-day VWAP last year, when the $A was $US0.745. That means they are currently down about 14.4% on their investment in $US. Why would they want to sell and book a loss when they are obviously long term believers in this company? The 14.4% loss is a combination of the 5% premium price they paid; the share price being about 4% lower now than the VWAP; and the 6.3% fall in the $A.
I know they are long term believers because they loaned big money to a company which is yet to make organic sales and which is burning cash - you would only do that if you believed in its long term future. The first tranche of debt was $US30m for 8 years and the loan is only repayable from net sales of remestemcel-L in the treatment of paediatric patients who have failed to respond to steroid treatment for acute GvHD, in the United States and other geographies excluding Asia.The interest only period lasts 4 years. Interest payments are deferred until after the first commercial sale. The financing was subordinated to the senior creditor, Hercules Capital, Inc. They are prepared to let another lender get their money first, they don't want any cash interest payments for 4 years and they are risking their capital for 8 years - that's a pretty impressive vote of confidence. Shareholders aren't taking that kind of risk! Of course, they are getting a fat rate of interest for lending the money (but 15% is similar to the rate shareholders are discounting earnings in their valuations, and shareholders get all the equity upside) - but it only ACCRUES interest for 4 years, it isn't actually PAID - so if MSB fails in that period, NQ has to line up behind Hercules before it gets anything.
NovaQuest was formed in 2000 as a strategic investment unit within Quintiles (now IQVIA), the world’s largest clinical research organisation, and became an independent firm in 2010.
Quintiles were the research organisation running MSB's trials and NQ's modus operandi is to take strategic interests in promising companies with both equity and debt.
An equity investment from NQ is a huge vote of confidence from a firm with strong links into global clinical research, with highly qualified PhD staff and a long history of backing promising companies.
The mechanics of the share placement were a sum of $US10m divided by the 10 day VWAP prior to 10 July 2019. That resulted in 8,474,576 shares being issued - ie the price to NQ was $US1.18. At the time, the $A was $US0.745, so an $A price of $A1.58. NOW, the parcel of shares is worth $US8.58m at a share price of $A1.45 and $A of $US0.6984. That is, an equivalent price of $US1.01. That means NQ are sitting on a loss of 14.4% BEFORE you take into account that to place the shares to instos would be at a discount - probably at least 10% - meaning a total loss of at least 25%.
Effectively, NQ shouldn't expect to breakeven on a selldown until the market share price is over $1.86 - they could then place the stock at a 10% discount $A1.69, which equates to the $US1.18 they originally paid.
But I believe these guys will be long term holders given their strong research driven background and their commitment to the long term of MSB as shown by the debt they have lent. The equity is there to provide them with big future "equity kickers" not to book a short term loss of 25%!!!
2. A rise in short selling in front of this deal?
That can only happen if there is stock available to lend, and shorters would only do it if they could see that they could buy back cheaply from a broker in a sell down (ie cover their short at a price discounted by around 10% to make it worth doing).
There has been almost no stock generally available for lending for several months now, and the cost of borrow is usually 15-18% pa - I suppose you might entice someone to lend if you really paid up a lot more to borrow stock - but in the absence of NQ selling down their line of stock, how are you going to cover the short? And you need to cover fairly quickly as the interest cost of a 6 month delay would wipe out the benefits of a 10% discounted placement, and any further rise in the share price due to FDA approvals and potential partnering deals would totally destroy any potential profits from shorting.
3. Could Bell Potter be trying to place NQ's 8.5m line of MSB shares?
Of course brokers are always trying to get lines of stock to sell, or to try to get companies to do capital raisings.
These days, with discounted brokerage rates and high costs of research, most firms don't make money out of brokerage (except maybe near the top of the cycle when volumes are huge) so they have to supplement their income with big one off fees from capital raisings and often by taking some of the stock onto their own books at a discount to hopefully flick out quickly for a profit to fatten up the fees.
That happens in every investment bank and they know where all the major lines of stock are and try to get access to sell them. However, nothing will happen if the holder doesn't want to sell - or if it doesn't make sense to sell, and I don't believe it makes sense to sell NQ's line of MSB shares.
By the way, NQ aren't babes in the wood on this stuff - they are a global investor and research firm and they know the value of their MSB shares better and in far more depth than Bell Potter (that's not to snub Bell Potter, but the debt guys always get much better access to information than equity analysts).
So, Bell Potter and everyone else can try to get their hands on this stock, but I doubt it will happen.
4. Bottom line
People who spout this sort of stuff without any back up are trying to scare you into selling. They hide behind comments that other people may sell, or shorters may anticipate something (and thus force the price down) without actually going through the numbers and the probability that it will happen.
Of course, there's a grain of doubt there, and there always will be, so they play on that, but I would prefer to go with the balance of probabilities and think that it isn't likely to happen - and if it were likely, why were instos overnight in the US paying a big premium (up to 20% above the Aussie close) for large volumes (over 1.2m share equivalent) and why were they so desperate to buy 2.28m shares in Australia today if Bell Potter is shopping around 8.5m shares for a discount???
Doesn't make sense.
I suppose if you were short, you might try to use the leverage of a simple, mechanical end of an escrow period (which was set in place 12 months ago) to try to scare people, but if that's the case it's a pretty cheap stunt.
This company has just proved to the market that the 35% fall in the share price caused by the NIH trial result last year was unjustified. The FDA has just given orphan drug designation to exactly what MSB claimed was the main outcome of the trial. It's not unreasonable to expect that 35% fall to be reversed, which would take the share price back up to $2.17.
Meetings with the FDA and InCHOIR in the next month could easily see a rapid pathway to approval (under the RMAT designation which has already been given) and that would be huge for the share price. Furthermore, it would make a partnering deal that much more attractive to a pharma (or LVAD manufacturer) and therefore more likely. The likely impact of LVAD is highly profitable for MSB, but imagine how many more LVAD implants could be done if the horrible side effects of GI Bleeding could be mitigated by MSB's cells - we currently work on the expectation of a market of 5,500 LVADs per year - but this could easily grow by multiples if the treatment became much safer - how valuable is that to an LVAD device maker?
There is so much upside in this stock that you would be poorly advised to sell because NQ MIGHT sell their 8.5m share holding. In the big scheme of things, even if it did happen (which I can't imagine at current prices) it is only 1.7% of the company BIG DEAL - GET SOME PERSPECTIVE!!!
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