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NGEN

NGEN

Posted by street ( track member | ignore member ) - August 16, 04:25PM

For those who follow pharma one may wonder why NGEN tanked after very positive news of a merger with a private co. to form a profitable global co. with EBITDA margin of approximately 10% of revenue, be cash flow positive and have sales in excess of $150 m. ...The reason is the deal was not your typical easy to understand acquisition with an obvious share price premium. The deal was a reverse acquisition of sorts. Elitech is a profitable private French co. They will acquire 58-69% of the combined company. The value their stake based on the share exchange is 66.5 million euros(for 58-69%. Cannot exceed 69%). This means the stake of NGEN share holders in the combined company is valued at $43.4-60million...will repeat for emphasis The deal valued NGEN at $43-60million at close of trading Thursday(compare to mkt cap of $26m at closing Friday)...deal values NGEN stock at $0.58-0.81(compare with price at closing on Friday of $0.35, after initial after hours rise of stock on Thursday by upto 12%). So you ask what happened... Why would such a positive, earnings accretive deal..lead to stock price tanking.. This is the key phrase(see 8K and details of announced deal) ..."certain existing Nanogen investors pursuant to which they will loan Nanogen $8 million to fund Nanogenâs operations during the period between signing and closing of the combination. Nanogen will issue to these lenders senior secured convertible promissory notes that are convertible into shares of Nanogen common stock at the closing bid price of the Nanogen common stock immediately preceding the signing of the interim funding agreements".... what this means is the convertible owners will have NO OPTION but to convert their loan to NGEN stock on deal closing... This is not your typical convert. where they get a return on coupon if stock falls and convert to stock at strike price if stock goes up... If I were the owner of the convertible owner or institution that did not own stock before the deal (disclaimer: I am not related, nor do I have any knowledge of who the convert owners are nor know their M.O. ..) ...it would be in my best interests for the stock price to go down to the lowest price possible so that my loan would garner me the largest number of shares possible at deal closingâ¦or for the institutional investor wanting in scare the heck out of the retail investor into selling their stock to me. So how does one get a stock price down...Naked short selling of course... And boy was it in full effect on Friday with >20% decline in stock price.... NGEN stock that had average daily trading volume of 304,533, traded >1.7million shares(6 fold increase in volume, mostly short)... Woe unto those small investors who get ridden out of this stock... at $0.35 compared this with deal valuation of NGEN stock at 0.58c-0.805... One can surmise two things are happening here...

1) Institutions that did not hold NGEN stock(institutional holdings were <8% of company stock) want in big time. Who is the fastest, quickest, smartest to act? I posit it is the hedgies! By shorting stock convertible at conversion will gain them a huge share of the co. dilutive off-course to the remaining un-sophisticated investors who at present own >80% of the company and are selling it in a daze(duh!!) or

2) Other smart investors who want in will see the deal value for what it is worth. A huge 160-240% appreciation in NGEN stock value(compare $-0.35-Friday close to deal value of 0.58-0.81) and squeeze the shorts... the latter will be possible only if deep pockets swoop in soon... If they do the stock price will rocket upwards as any convo shorts will be overwhelmed... I am voting with my pockets and think the latter scenario is going to play out. An 8m convo is chump change for a smart investor...

That is why it is called the market folks...And some smart investors, including some very smart hedgies know how to exploit inefficiencies in the market..

But don't take my word for it. Do your own due diligence & get smart. Remember NGEN is not "going out of business". They have great technology and are a leader in their field. The are leading the U.S. Centers for Disease Control and Prevention (U.S. governmentâs) efforts to develop a test for a potential influenza pandemic; the CDC avian influenza project. They did not get the contract on the basis of shoddy tech... the tech is good..the co. is here to stay..
Good hunting folks and may the smartest investor win..

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Commented by

street ( track member | ignore member ) - August 17, 05:36PM

I hate to comment on my own post. But my comment is more of an addendum. After additional DD, I focused on the following Quote from NGEN 8-K ..."Intercreditor Agreement, dated as of August 14, 2008, among the Company, Portside Growth and Opportunity Fund, as Collateral Agent"...From publicly available documents, Ramius Capital Group, L.L.C. an affiliate of Ramius Capital has been an investment advisor to Portside Growth and Opportunity Fund on previous deals. Disclaimer: I am NOT suggesting nor will I speculate, nor do I have any information as to whether Ramius Capital is involved in the NGEN deal. I urge readers of this post to be careful before drawing such a conclusion. As noted on earlier posting, NGEN valuation EV/EBTIDA and fact that NGEN/Elitech combined entity will be ?cash flow positive/ 10% EBITDA positive; It is my conclusion that for any current investor, a declining stock price will have a significant dilutive effect on your current holdings, unless, one keeps buying as the stock price keeps going down. That way, one will keep up with the dilution. Plus sentiment in the stock will turn once current investors get it. Any shorts in this small company can be easily overwhelmed if current investors and other institutions start/keep buying. Most sales on Friday were not large, they were small, not exceeding 200k for a company with a float of >70m shares. However the total volume for the day was >x6 average daily volume, suggesting a lot of small lots were sold(?retail investors fleeing..or being stop lossed out!). Word of caution to any panicked retail investor, remember, the owners of the convertible will have the conversion done at the price of the stock on the day of closing of the agreement. If current holders keep buying and maintain the stock price above $.50, they will make out like bandits. If they allow the shorting to drive the stock price down, below the $0.44 at time of the deal announcement..well...they will regret the dilutive effect on their holdings... Any PROS on tickerspy who read posts...wanna get in on the action?.. poster has a track record!

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