Stockwatch: Those That Cannot Be Successful Raise Money

The reputation of AMAG Pharmaceuticals Inc. of regularly disappointing in its earnings announcements was cemented by its first-quarter results which missed analysts' consensus estimates of sales and earnings. Loss-making AMAG has desperately tried to divert investor attention away from its own developed product – Feraheme (ferumoxytol) for iron deficiency anemia (IDA) and whose quarterly sales have stagnated at $25m a quarter – towards those it acquired in the run up to last summer's valuation peak. Unfortunately the corporate development prowess at AMAG seems to be on a par with its drug development capabilities. AMAG's recently acquired product Makena (hydroxyprogesterone caproate) – which is indicated to lower the risk of pre-term births and was acquired for $750m up front plus $350m in sales milestones – had first-quarter sales of $65m missing consensus estimates after declining 3% from the previous quarter. The analysts from Jefferies pointed out that the delay to the subcutaneous auto injector version could result in an approval just as Makena's orphan drug exclusivity expires in 2017. AMAG's catalogue of errors and its $1bn debt saddle do not make it a prime candidate for a dilutive issue of equity, especially in the current environment where fundraisings – like the recent cancelled Bavarian Nordic AS public offering – are shunned. But the issuance of positive research notes from every analyst I follow and an analyst meeting on June 1 may be conspiring to convince investors that night is day, black is while and AMAG is a viable investment proposition.

This mirage making has all happened before when my inbox was deluged with positive research notes on the loss-making diagnostic company Exact Sciences Corp. prior to its $179m share offering in July 2015. Exact Sciences' first-quarter sales for its colorectal cancer diagnostic test Cologard were an underwhelming $14.8m. The low uptake of Cologard since its launch in August 2014 is not the most damming indictment of its investment proposition. Soon after the share offering, holders were hit with the twin disappointments of Cologard's status not being elevated in the United States Preventive Services Task Force (USPSTF) guidelines and 2016 test volume guidance that was below expectations. Like AMAG, Exact Sciences' disappointments were not a one-off as its fourth quarter 2015 results were a drastic preannounced reduction in test volume. The analysts from Jefferies described Exact Sciences' first-quarter 2016 Cologard volume as "better than feared" but the analysts from Mizuho finally threw in the towel, downgrading their recommendation to "Neutral" and noting the risk to 2016 test volume guidance. Those investors who were taken in by the July 2015 offering at $25.50 saw their shares close last week at $6.50.

Keryx Biopharmaceuticals Inc. seem to be at the stage just before a deluge of supportive sell-side research notes and a share offering cannot be that far away. Loss-making Keryx's first quarter sales of its product Auryxia (ferric citrate) – an absorbable phosphate binder approved to manage hyperphosphatemia and approved by the FDA in 2014 – were an anemic $5.6m. Sales were slightly ahead of analysts' consensus estimates of but earnings (or increased loss) missed estimates. Keryx also announced that plans to partner Auryxia in the EU were taking longer than they expected (my guess would be that greater sales would help) and positive Phase III results for Auryxia in iron deficiency anemia (IDA). With $171m in cash at the end of the last quarter and $125m in debt, Keryx's investors should take into account the commercial performance of Feraheme in IDA and the absence of a licensing deal when the offering is announced.

The inverse correlation between fundraising by a biopharmaceutical company in pre- or early-commercialization of its lead product and the licensing or acquisition of that product was established by Amarin Corp. Loss-making Amarin received FDA approval for its lipid-lowering fish oil extract Vascepa (icosapent ethyl) in July 2012 and in the months that followed expectations rose for either the acquisition of the company or the licensing of Vascepa. These expectations lasted right up until the $100m debt offering in order to fund the launch. ( (Also see "Amarin borrows $100m to launch Vascepa but keeps alliance door open" - Scrip, 7 Dec, 2012.)) Although the Amarin CEO suggested that the fundraising gave the company the resources to sell itself or partner Vascepa, with first-quarter sales of $25.3m, cash of $81.4m and the debt repayment in 2017, no partner has emerged.

Many UK, Australian and Canadian small-capitalization life science companies bemoan their need to frequently raise small amounts of money from their armies of retail investors. The endgame for these companies with non-commercial products or a long and uncertain road to a viable business model is therefore a schedule of dates with underwriters. In the US, investor patience seems to take much longer to run out but when it does, it is more activist and the end result is a different date. With the liquidator.

Andy Smith is chief investment officer of Mann Bioinvest. Mann Bioinvest is the investment adviser for the Magna BioPharma Income fund which has no position in the stocks mentioned, unless stated above. Dr Smith gives an investment fund manager's view on life science companies. He has been lead fund manager for four life science–specific funds, including International Biotechnology Trust and the AXA Framlington Biotech Fund, and was awarded the Technology Fund Manager of the year for 2007.