OrthoLogic Corporation (NASDAQ:CAPS) is a little unusual for us. While it trades below its net cash value and Biotechnology Value Fund (BVF) has disclosed a 13.42% holding, BVF’s holding is passive. At CAPS’s $0.60 close yesterday it has a market capitalization of $24.4M. We estimate the net cash value to be 80% higher at $1.08 per share. CAPS’s cash burn rate is quite high relative to its net cash position, so rapid steps need to be taken for this to be a profitable investment. We think that BVF is a good bet, so we’re adding CAPS to the Greenbackd Portfolio.
CAPS is a development stage biotechnology company focused on the development and commercialization of the synthetic peptides Chrysalin (TP508) and AZX100. Effective October 1, 2008, OrthoLogic Corp. is known and doing business as Capstone Therapeutics. The company’s investor relations website is here.
The value proposition
The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):
Note that we have used the September 10Q. CAPS’s most recent filings indicate that cash is actually $48M (see slide 13), but we don’t know what the rest of the balance sheet looks like. The presentation also gives cash burn guidance this year of $14M to $16M.
The company also included the following in its 10Q, which seems to indicate a shift to cash preservation:
We announced that we have no immediate plans to re-enter clinical trials for Chrysalin-based product candidates and a strategic shift in our development approach to our Chrysalin Product Platform. We currently intend to pursue development partnering or licensing opportunities for our Chrysalin-based product candidates, a change from our previous development history of independently conducting human clinical trials necessary to advance our Chrysalin-based product candidates to market. We will continue to explore Chrysalin’s therapeutic value in tissues and diseases exhibiting endothelial dysfunction as well as the science behind and potential of Chrysalin. We will also continue research and development expenditures for further pre-clinical studies supporting multiple indications for AZX100 and plan to continue AZX100 dermal scarring human clinical trials.
Off-balance sheet arrangements and Contractual obligations
There is no discussion in the September 10Q about CAPS’s off-balance sheet arrangements or contractual obligations.
Given that BVF has filed a 13G notice, which indicates a passive investment, we’re not entirely sure what BVF has planned for CAPS. It’s possible that it is simply a passive holding. We’re reasonably comfortable following BVF into CAPS because of their efforts with Avigen Inc (NASDAQ:AVGN) and Neurobiological Technologies Inc (NASDAQ:NTII).
CAPS has been undertaking a stock repurchase program since March 5, 2008. At September 30, 2008, the company had repurchased 1.1.M shares of its common stock, at a total cost of $1.0M, and had allocated approximately a further $1.1M to fund possible future stock repurchases. We don’t know the status of the buy-back at this time.
At its $0.60 close yesterday, CAPS is trading at 55% of our estimate of its $1.08 per share net cash value. The risk for this investment – as it is for all of these types of investment – is that CAPS dissipates its cash before it or BVF can salvage that value. Management is taking steps to reduce its cash burn and repurchase undervalued stock, which is encouraging. Perhaps this is what BVF has seen, and the reason BVF hasn’t filed a 13D notice. We think that BVF is a good bet, so we’re adding CAPS to the Greenbackd Portfolio.
CAPS closed yesterday at $0.60.
The S&P500 Index closed yesterday at 752.83.
Hat tip to ef.
[Full Disclosure: We do not have a holding in CAPS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]