Mexican Stand-off Continues - a big rise coming when it’s over - Santa rally here we come!
The MSB price has been trapped in a tight range since Capital lodged its substantial shareholding notice on 23 October. You can see that similar periods in 2019 have preceded big rises in the share price (see purple bands on the graph below) – i.e. when MSB has traded in a 10c range for 4-6 weeks that has been the lull before the storm and there have been strong rises after the period of low volatility. The first one in February- March was caused by Capital’s selling being cleared with a crossing at $1.15, and the price subsequently rose to $1.65 (up 43.5%). The second in September was caused by the Grünenthal partnership deal and a rise in the price from $1.455 to $2.23 (a rise of 53.3%):
Some interesting big volume moves this week - important to interpret the nuances
There has been at least one big buyer this week and it looks like at least one real seller and a potential short seller. I don't think Capital did any selling (at least on Wednesday), or there would've been a substantial shareholder notice by now (going below 5%) - and whether Capital will sell their remaining holding or not remains uncertain. However, I believe the Capital line of just over 5% of MSB's capital would likely be snapped up around current levels of $1.80 by the funds who were cut back in the recent placement at $2 - whether Capital wants to sell at that price remains moot.
It appears that a large part of Thursday's selling was new short positions by someone trying to front-run the potential Capital selling. It could be that they thought Capital had lost patience and was selling in the market on Wednesday as low as $A1.82 - which implied that no-one was prepared to buy their remaining 27.5m shares. I think the shorters may have been mistaken if that's what they thought, because if Capital had sold that many shares we should've seen a substantial shareholder notice lodged this morning indicating that Captial had dropped below 5% of MSB's equity.
It appears that the big crossing of 1.98m shares on Wednesday was someone other than Capital selling, and therefore there may not be any more selling behind it (maybe some loose hands from the recent placement, but there could be all sorts of reasons).
It would be a strange move if it was Capital selling, as it would've removed less than 10% of their remaining holding and would've indicated they were prepared to push the price down to get out. You may do that if you could move a significant chunk, but not for such a small amount relative to what they have left to sell - particularly because Capital would have to disclose it within 2 business days as selling 1.98m would take them below 5% and require a substantial shareholder notice. If Capital were acting in this manner, they would just drive the price down every day until they were out and then there would be an embarrassing bounce back (like the 3-day bounce from $A1.15 to $A1.50 last time they got out in February).
Another Capital miscalculation?
In fact, I don't think Capital were planning on selling a full 1% up to 21 October - I think they got caught out by the 7.5% placement reducing their % interest in MSB. They had held 30,755,583 shares prior to the placement, which was 6.168% of the 498,659,542 shares on issue prior to the insto placement. They sold 3.193m shares - which would've only been 0.64% of MSB's capital prior to the placement, however their remaining shareholding of 27.563m shares were only 5.136% of the expanded 536,679,434 shares on issue after the placement - barely more than a 1% reduction of their % holding in MSB. They've been caught out like this before (well different reason, which appeared to involve double counting their ADR holdings, but same outcome - a 1% move when they look like they were trying to keep it less than that and thus avoid lodging a notice) - ie I don't think they were planning to sell over 1% of MSB's shares, but they misjudged the impact the placement would have when combined with the other selling they had done. That could be harsh - nobody knew the placement was coming so maybe it was just bad luck for Capital (but they seem to be cursed with bad luck over this holding).
To add to the embarrassment, imagine if it were Mark Denning's blind trust doing the buying in the past few days (and Capital wasn't aware who was buying)! Capital would then be dumping the price down to the ultimate benefit of the beneficiaries of Mr Denning's blind trust. I'm not saying that's what's happening (not at all) - but Capital would want to avoid such a bad look and may just be taking their time to dot i's and cross t's before making things worse, after two bad miscalculations in the past year. So, I don't think Capital was a seller in the past few days and I think they're catching their breath before deciding what to do next.
Capital may not even be a seller in the future - they may have just wanted to tick the holding down less than 1% while they make a decision what to do now that Mr Denning has gone and they have a new fund manager. If they decide not to sell, it would make everyone's life easier if they made an announcement to that effect. If they are a seller, it would be better to get it over with before the price is driven even lower as people speculate what they are up to.
I note that there were a couple of special crossings on 25 October at $1.80 (which were 600,000 shares in total) which could possibly have been Capital selling as it would've left them just above the 5% disclosure level - however, I doubt it was them given the amount of time which has passed and the lack of further sales or a substantial shareholder notice, and the mess they had already got themselves into.
Returning to out muttons - did yesterday's short seller misread the situation and jump the gun?
So, if yesterday's selling was new short selling, based on the fact they thought Capital was dumping big lines in the market on Wednesday at a price below where Capital had previously been selling (previous average price $A1.87), then they may have made a mistake, and realised it this morning when no substantial notice came out from Capital.
That could be why the volume is so low today - the shorter isn't active, Capital isn't active and the buyer(s) has hoovered up maybe 3.3m to 4m shares on Wed and Thurs and is happy with what he's got. He (or they) may be back next week.
My reason for thinking this is:
the Gross Short trading yesterday (Thurs 7th Nov) was an unusually large 1.339 million shares out of the total 2.428 million shares traded (including Chi-X). Gross short selling had almost dried up since Capital made their last substantial shareholder notice on 22 Oct (received by MSB on 23 Oct at 843am for transactions up to and including 21 Oct), with the biggest day of gross shorting being only 266,000 over that period. So yesterday's gross shorting was more than 1m shares more than the highest gross shorting over that period. So, yesterday could well have been the normal daily trading volume of around 1.1m shares plus extra selling of 1.3m from the shorter and extra buying of 1.3m from a biggish buyer (who may or may not be the same one buying 2m in the crossing on Wednesday).
note that there have been no substantial shareholder notices from Capital since 23 Oct - so they are still over 5% of MSB's shares, as a substantial notice is required for every 1% reduction AND a one-off notice for when you go below 5%. The notice on 23 October disclosed that they owned 27.563m shares plus ADR equivalents which was 5.14% of MSB's equity. The next threshold is 5% which is 26.834m shares - so they will go below 5% after cumulative sales of 729,000 shares since 21 October. The fact that they haven't lodged a substantial means they've sold less than 729,000 shares since 21 Oct.
a substantial shareholder notice is required within 2 business days of the transaction - Capital lodged the last one at 8:43am on the second business day after the last sale - so if they were active in the crossing of on Wednesday this week, we could have assumed a substantial notice this morning pre-open. It didn't come - that must have the shorts (and almost everyone else) scratching their heads.
after Capital lodged that 23 Oct notice, net shorts reduced by 1.3m over the next two days. It may be that the shorter re-shorted that 1.3m shares yesterday, so we'll find out next Wednesday.
The previous day (Wednesday 6th) there were 2.701m shares traded but no noticeable gross shorting activity (only 231,000 gross shorts), so I'm assuming that the 1.98m shares in the crossing was a real buyer and a real seller. Of course gross shorts are only a hint of what's really going on with the net shorts, and we've been through all of those caveats in the past, so I'm not going to go through them again. These are just my best guesses of what's going on.
So what IS going on?
My best guess is that someone was shorting yesterday - ie they saw the big volume on Wednesday (particularly the crossing of 1.98 million at 1:15pm) and assumed that Capital was back in the market selling and was prepared to sell at lower prices than previously (though I think it is a mistake to think this). Note that outside of that crossing only 720,000 shares traded on Wednesday. So, my guess is the shorter went into the market on Thursday and took a risk that Capital would keep selling parcels of 2m shares at lower and lower prices. The shorter was probably a bit worried this morning when no substantial shareholder notice came out from Capital and therefore the shorter has backed off shorting on Friday and will probably wait (like everyone else) to see what Capital does next.
The really interesting thing in all this is that there is a buyer (or buyers) prepared to break ranks and buy a few million shares in the full knowledge that Capital may eventually sell 27m. The buyers are either confident that the Capital line will be snapped up (possibly including themselves as buyers) or that Capital may not sell after all. The buyer(s) are probably also confident that the share price will bounce once the Capital overhang is out of the way (either through selling their line or by making some sort of announcement that they have reviewed the holding and are not sellers).
The bounces in the share price over 2019 have been typically large - particularly after a period of 4-6 weeks of low price volatility - and particularly when there has been a big announcement or removal of a stock overhang. A similar 43% to 53%price rise now would take the MSB price to new highs for the year, above $A2.50.
Furthermore, this would be happening at a time when other biotechs are rallying in the context of a global risk-back-on trade. In the past year our partner JCR Pharmaceuticals is up 91% (from its low in December 2018), Takeda is up nearly 30% in the past 2 months (since the low at the end of August). Big stocks like AstroZeneca and GlaxoSmithKline in the UK and Sanofi in France are up 15-40% from their lows in 2019 and are near their highs for the year. US stocks Amgen (+31% from the May low) and AbbVie (up 31% from the August low) and Bristol Myers Squibb (up 35% from the July low) have also recovered from the global wobbles of trade wars and Brexit. Eli Lilly is the only major (over $US100 bn market cap) which is disappointing in share price terms in 2019. And some of the "smaller" US companies like Celgene have had a ripper year - up 86% from last December's low.
Having said all that, MSB has had a stellar year - currently up 76% from last December's low - amid huge short covering. The Net Short Position is currently only 4% of the company's expanded capital vs 8.35% in February. That's a huge reduction of 20m shares in the short position - and represents a month's worth of trading at the current volume (and the year's average volume) of 1m shares per day - however, that assumes the total daily volume is short covering - if you assume the shorts only get 50% of each day's trading, it would take the remaining shorts 2 months to cover, and much longer if new shareholders continue to add to their holdings from the placement, with their buying crowding out the remaining shorts who are trying to cover. Add excitement from announcements that are due between now and Christmas (BLA filing with the FDA for aGvHD in the US and an announcement regarding the completion of the CHF phase 3 trial in the US) as well as partnering deal announcements that are "in active negotiations regarding potential commercial transactions and access to non-dilutive capital" according to MSB's recent 4C filing and you have further potential for explosive price rises. That may even be enough to enter the ASX200 Index for the March 2020 rebalance (however that's still a long way off yet) which could set off buying by the big index funds and quasi-index industry funds.
Looks like demand for biotechs, good announcements and a resolution of the Capital overhang could add up to a big Santa rally for MSB!
MSB Price at posting:
$1.79 Sentiment: Hold Disclosure: Held
(20min delay)
