By Jason Napodano, CFA
Today, I am initiating coverage of Amarantus BioScience Holdings, Inc. (AMBS) with a 'Neutral' rating and $0.25 price target. Yes, a 'Neutral' rating. Neutral based primarily on the risk inherent in investing in any stock trading at this low in price. Neutral despite what I see as a story that is meaningfully undervalued based on my review of the science around the company's two core assets, the therapeutic agent MANF and the Alzheimer's diagnostic kit LymPro. Neutral despite a management that has worked tirelessly over the past several months to clean up the balance sheet, remove debt, bring in and validated new assets, expand the executive talent, settle all outstanding lawsuits, shoulder accountability, and put the company on a path for creating significant shareholder value. And neutral despite a price target of $0.25 that clearly points to massive upside in the shares.
...A Little Credibility Goes A Long Way...
It is clear to me that there is significant opportunity in the shares, and the current price of $0.04 – a market capitalization of around $16 million – vastly under-appreciates this potential. I originally became attracted to the story because of MANF for Parkinson’s disease, but now believe orphan indications around ischemic brain damage present more meaningful and near-term upside to the story. Likewise, I believe that LymPro could be a game-changing in the Alzheimer’s diagnostic market.
But I am fully aware that investors will be skeptical of Amarantus based purely on the price of the shares. A $0.04 stock surely has no credibility? This is presumed by almost all investors, including myself. To confirm the preconceived notion, I sat down in January 2013 with CEO, Gerald E. Commissiong, face-to-face. I exited the meeting less presumptuous, more curious; I began digging.
Over the next five months I saw several instances that proved to me, this was a credible CEO and a credible company. For example,
- The company has been highly active at investor conferences, including OneMedForum (January 2013), Biotech Showcase (January 2013), BioCEO (February 2013), TBI (February 2013), C4CT (March 2013), BioBusiness Forum (April 2013), and the Marcum MicroCap Conference (May 2013). Most of these presentation have been achieved on the company's new website.
- The company has expanded is Board of Directors, and Board of Advisors. In April 2013, the company hired a newDirector of Investor Relations, and even hosted its first business update conference call with analysts and investors.
These are little things, individually insignificant because they are normal things publicly traded companies do. But for a $0.04 stock, they become altogether meaningful by showing that management is not hiding from investors or analysts. They are open and have made efforts to be accessible. I can attest to that. From an investor relations standpoint, this is not what one would expect from a $0.04 stock.
From a science standpoint, I think both MANF and LymPro have credibility. For example,
- The company has gone to great efforts (at expense) to validate the science behind both MANF and LymPro. Scientific credibility starts with presenting statistically significant data in validated models of target diseases. It involvespublishing the data in peer-reviewed and respected medical journals, and backing up that data with follow-on publications.
- The company has made available online a White Paper reviewing all the sponsored and independent literature on MANF (including opposing opinions). In my experience as a professional stock analyst for the past 16 years, companies trying to hide data from investors do not publish thorough scientific reviews for all to see. This is not a management that is afraid of the science or hoping to trick investors by data-mining, sub-populations, narrow indications, or fancy assays. They are confident that what they have with MANF is real, is big, and are not afraid to outline an aggressive pathforward to realize its value.
- The company has provided a similar thorough open access White Paper analysis of LymPro. I have looked at LymPro myself, and like what I see. It's a potential game-changer in my view, and the timeline for generating revenues from LymPro is nearer than most investors think. The development strategy for LymPro is aggressive. Management hopes to announced a well-known and respected partner GLP lab to conduct the CLIA validation work on LymPro in the next few weeks.
Amarantus has done an admirable job over the past several months in telling its scientific story. Most of the time when investors question a company on its science, management will dance around trade secrets, intellectual property protection, or point to ambiguous literature as validation for ill defined paths forward. On the contrary, Amarantus has embraced the concept of full disclosure on par with or superior to many well known and respected biotech companies. Similar to the company's attendance at conference and in communicating with investors, this is not something one would expect from a $0.04 stock.
...A Little Cash Goes Even Further...
From a management credibility standpoint and from a scientific validation standpoint, Amarantus does not look like a $0.04 stock. From balance sheet and capital structure standpoint, it surely does. As of May 13, 2013, the company had a whopping 385.0 million shares outstanding. As of March 31, 2013, the company held only $0.240 million in cash on the books. In January 2013, the company secured a commitment for $1.4 million in cash. The final tranche payment was made in April 2013. Despite this, the company does not have enough funds to push MANF or LymPro forward without raising significant cash in the next few weeks or months. We note the company is not currently in default on any loans or debt.
What investors should watch for over the next few weeks or months is simple - Can Amarantus secure quality capital to push MANF and LymPro forward without massively dilutive or toxic financings? Can management, who as far as we have seen has done everything right they can over the past six months, get the cash they need to tie this entire story together and send the shares higher?
I think MANF is a potential blockbuster for the treatment of Parkinson's disease, traumatic brain injury, or other ischemic disorders. Notice I said "I think" and "potential" - it's still too early to make bold fist pounding predictions. However, I encourage investors to read the White Paper on MANF and read my article that reviews all the available scientific literature. Then make your own decision.
Next, read the White Paper on LymPro. See if you agree with why I think it could be so significant for the diagnostic market and the treatment of Alzheimer's disease. Again, I'm not pounding the table here or force-feeding overly bullish hyperbole. The science is all there available for investors to delve deep. One thing I will note, look for the announcement of a GLP lab partner to do the CLIA work on LymPro coming soon. If Amarantus can attract a big and highly respected name - a major player in the diagnostic market - I think that will validate the opportunity.
If you like what you read, next familiarize yourself with how I arrive at a valuation of $0.25 per share for the entire company in the 27-page Zacks report. Start checking off the boxes, and then make a decision based on all that available information whether or not Amarantus is worth $0.04 per share. The logical question investors may ask is, "If you think it is worth $0.25, why not rate it a 'Buy'?" Quiet simply, what I think the stock is worth and where the market will bid the shares are two different things. Yes, I think Amarantus is worth $0.25 based on my knowledge of biotechnology and financial modeling. The target is objective. That's what my models say, so that's what I put on the report. It's all there for anyone to read.
The 'Neutral' rating takes into consideration the risk, the need for cash, and the fact that most investors will remain skeptical of the story. It's perception. The rating is subjective. But I conclude with this, be on the look-out for a meaningful and quality financing that could spark the start of a change in perception which leads to a re-valuation of the shares. Having enough cash to move this story forward, eliminating the final hurdle what keeps the shares at $0.04, is the inflection point in my view.
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By Jason Napodano, CFA