lodge re-rate blt to $3.20

Recommendation: The capital raise positions Benitec to create very significant value over the next year for shareholders. We retain our BUY recommendation and increase our price target to $3.20.

Event: In late February, Benitec entered into agreements to raise $31.5m in two tranches of approximately $15.7m each. The first tranche has settled, with the second requiring shareholder approval. This note looks at the reasons for the capital raise and what it means for the company.

Comment: The capital raising undertaken by Benitec places it in a position to take advantage of the options that a strong balance sheet provides life science companies. It is also a strong positive signal regarding the company’s prospects given the institutions that took part in the raise. These are likely the reasons why Benitec’s share price closed at $1.85 (+16% on the pre-raise price) on the day the raising was announced, before hitting a high of $2.38 (+50%) in the days afterwards. The stock has since settled in the $1.85 - $1.95 range (~+19%).

Anecdotally, ASX-listed life science companies carry substantially less cash on their balance sheets than their international counterparts. Table 1, below, illustrates this observation in the context of companies with similar technology to Benitec’s.

Prior to the raising, Benitec had approximately $5m cash; Silence, the company with the second lowest amount of cash, had seven times that at $36m. It is clear that Benitec was under-capitalised prior to the raise.

There are numerous reasons why life science companies often need a healthy cash position. Two of these, R&D spend and the number of pipeline projects are given in the table for reference purposes. Others include, the:

ability to recruit and retain highly qualified staff with very rare skills;
need to develop a core competency in the science of the intellectual property they possess and associated technologies where appropriate;
need to develop a robust enough scientific and clinical understanding of their product(s) to enable licensure and, ultimately, sales;
ability to raise further capital at the best possible time (not just when required);
option of walking away from a licencing deal if it is unsatisfactory.

Importantly, the capital raised by Benitec came from a number of highly regarded US institutional healthcare investors (e.g. RA Capital Management, Perceptive Advisors, Special Situations Funds and Sabby Management). These investors are capable of and do undertake extensive due diligence before investing. RA Capital, in particular, has an excellent understanding of Benitec’s technological space. It has invested in two of the sector’s best performers in Arrowhead Research (NASDAQ: ARWR) and Dicerna Pharmaceuticals (NASDAQ: DRNA).

These investors provide benefits to the company, as well. The quantum of funds they have under management means that they are capable of supporting the company in any future capital management endeavours. They also have extensive networks, which the company can draw on for directors, management, product development and regulatory advice, among other things.

Conclusion: As is clear from the table, Benitec has been under-capitalised relative to its peers. This situation has and is being addressed. The source of the capital raised provides a strongly positive signal about Benitec’s prospects, while the actual capital provides the company with benefits ranging from the ability to accelerate product development to negotiating strength in any partnering talks. While the stock has risen strongly recently, the comparables on the left hand side and table 1 above indicate further significant gains are a distinct possibility.

p.s. At these prices I have changed my sentiment to 'BUY' (and am doing so).

-RS