It seems the market does not like PYC at the moment, and...

It seems the market does not like PYC at the moment, and possibly with good reason(s).

Management credibility is clearly one thing people are upset about - Nick has made a right fool of himself with his calls on new deals, cash flow sustainability and no more capital raisings. Where’s his credibility ? With the share price it seems.

Retail investors also seem (rightly) peeved about being left out again, but is this a reason to throw in the towel ?

So, with such a bad reaction I've been thinking about the business case and what is going wrong.

Positives

• Whilst I do not understand the science 100% it seems strong and in the hottest sector in biotech. There are fortunes to be made here, not to mention the potential it could have in helping improve the quality of millions of peoples lives.
o It seems to me that the fact that 3 of the top 10 pharmaceutical companies in the world have looked at the science AND said it works seems like pretty good validation to me.
• Then there are another 3 of the remaining 7 negotiating deals. That will be 6 out of the worlds 10 largest pharmaceutical companies backing the science. I’m good with that.
• Despite the cash flow sustainability moving out further than we want it has improved dramatically. What was it $400k in 2010, $2.4m in 2011 and projected to be $5m+ in 2012. There’s not a lot wrong with revenue growth like that in my books.
• The latest raising gives them capacity to keep moving forward without any deals for nearly a year. This has to take some pressure off negotiating deals and placing PYC in a stronger position. Big pharma is not known to be sympathetic if it smells blood in the water.
• Deal flow seems to be slower than desired, but in many respects this is largely out of the hands of PYC and up to the pharmaceutical companies. The fact that they are still talking deals is pretty darn good given the turmoil in global equity markets and how carefully boards are managing their expenses.
• There are some significant and professional investors taking pretty big positions. In my reading of them they don’t look to be fools.
• In relation to deal flow, what have we seen so far this year:
o Roche, Medimmune and Pfizer ALL validated the science and agreed to move ahead to stage 2. A 100% success rates on initial collaborations seems unbelievably good to me. Do many businesses you know have 100% success rates?
o Roche and Pfizer are both yet to put there $’s in the tin, giving PYC even more cash. These have to be done in the next quarter if they stick to their agreements. Milestone payments at this stage should be around $500k each, but others may know better than I on this.
o Then there is one new deal to be announced by 31 December, which I am confident will appear as mgt have stated it within the last few weeks and wouldn’t be that stupid to announce unless it was in the bag. Given the deals get larger as the science is validated I’d expect a reasonable up-front on this one.
o Then there should be another 2 in the next 6 months – assuming management isn’t lying. A weak point given current sentiment I grant.
• Then there are other positives such as Phenomica and the internal candidates that have been given no scope at all.

Negatives

• The current environment for any business is tough, especially in Europe where lots of the major pharmaceutical companies are.
• Nick has promised 3 deals by now and not produced, promised no more capital raisings and been found wanting and promised cash flow sustainability this year. With none of these things occurring his credibility has to be stretched and he’d better start delivering or he can head home with his tail between his legs. BIG question mark over whether he is the right man to lead this company.
o In his defence though he can’t control the speed at which pharma do deals, this impacts his cash flow call and his need for future working capital / capital raisings. A domino effect that I’m sure frustrates him as much as us.
• Pharma could step in and steal this company for a fraction of it’s potential worth unless the share price improves, meaning we could all get duded, although there is enough closely held stock to make this difficult.

My conclusion is that the science is good it’s just the deals are taking longer than desired, but this is largely out of their control, so....it will get there eventually, even on the science alone.

What I think the problem is in the short-term is that management have to communicate a bit better. Nearly nothing positive has come out in the last 10 months, just scientific presentations and annual reports. Management appear VERY POOR at PR - managing the market, telling a story (not necessarily making promises they can’t deliver) and building shareholder support. There seems to be a good story to tell, but it’s not being told. Hopefully a lesson like today will encourage them to do better in this regard.

In the meantime happy to take up more at these prices.