A bit more insight into what's going on with the MSB share price
There have been a few questions regarding the price pullback, the discount to the $2 placement, why insto's aren't topping up at below the placement price, shorting, flipping, manipulation, etc.
1. Price rise in perspective - still tracking 2010 Cephalon move
The Cephalon deal in Dec 2010 saw the price rise from $3.30 to a high of $9.95 in 2011. There were pullbacks along the way. The price rise and first pullback since the Grünenthal deal last month is currently similar in percentage terms to the first rise and pullback post the 2010 Cephalon deal.
The rise in the price from $1.45 pre Grunenfeld announcement to $2.23, then a pullback to the low of $1.90 today (net move up 31%) is actually still slightly ahead of the pullback after the first move up in Dec 2010 after the Cephalon announcement (up from $3.30 to $5.34 then pulling back to $4.27 - for a net rise of 29.4% after the first pullback).
To exactly match the first Cephalon pullback, the price could fall to $1.88. There's no reason that the two percentage moves should be exactly the same. My point is that this current percentage pullback is similar to that of 2010, yet the price subsequently moved up to nearly $10, or 3x the starting price. A 3-bagger now would take us to $4.35, still below the 12-month price targets of some of the analysts such as Cantor FitzGerald, Bell Potter and Maxim Group.
The placement of 37.5m shares has obviously taken a bit of steam out of the share price, and at the margin has released some of the short-term buying pressure. There still appears to be some profit taking in the wake of the first move up, which generates some extra selling, while some of the buying pressure has now abated. Once this profit taking has been digested, the price should start to move ahead again. Any positive announcements on further partnering deals or successful trial results or FDA approvals would add fuel to any price rise.
2. Standard indigestion
My view is that this current pullback is standard indigestion after a placement. Almost all placements and rights issues come back to the placement price in the short-term and even trade a few cents below - despite what brokers quote about TERPs (Theoretical Ex Rights Price), discounts etc.
The reason is that some of the stock always ends up in weak hands - including the hands of the broker raising the money (or their best friends) and they intend to flip it on the first day to make a profit - they really don't care if it's trading at a discount or below the TERP etc - all that matters for their profit is whether it is above the price they paid. Even if it isn't above the price they paid, they often don't have the balance sheet strength to carry the position and have to sell even if it's for a small loss.
I know that at least one large insto broker was offering credit to funds to take up the placement (usually hedge funds would be involved in this sort of trade). I don't know how much may have gone to clients of such brokers, maybe very little, and they weren't officially involved, but firms like Aitken Murray and Bell Potter don't have access to all the large instos, hedge funds etc - so they often offer some stock out to firms like Goldman to access a broader range of clients. Possibly even some insto brokers took some of the placement on their own books and then flipped it, or the hedge funds took it on leverage and then had to cut their losses when it didn't go up.
None of this stuff makes any difference longer-term (and neither BP nor MSB have informed me where the stock actually went) but it certainly affects short-term trading in the wake of a capital raising.
Fundamentals are immaterial in short-term trading. It doesn't matter if people value the shares at $A5.00 in the next 12 months - you may have to sell regardless of the longer-term valuation if you are under pressure to make a short-term profit or avoid a short-term loss, or if you don't have the balance sheet to be able support holding a position for any length of time.
3. Why would a broker risk taking stock on their own book?
Remember that most brokers are lucky to break even on their brokerage commissions after taking research and back office costs into account. The best way for them to make money is fees on capital raisings.
Look at it this way, as a broker, you can charge around 4% on a capital raising of this size - say $3m on a $75m raising. Alternatively, charging 10bp for insto brokerage, you have to transact $3 billion worth of trades to earn the same $3m. That's 3x the total market cap of MSB (more than 50% of which never trades), or at last year's average daily volume of 1.1m shares would take 1363 trading days (nearly 5 1/2 years - and that's if you get ALL the volume traded). Alternatively, if you assume a relatively fat insto brokerage rate of 0.2% and assume you get half each day's volume - it STILL takes 5 1/2 years of trading commission to match the $3m placement fee.
Is it any wonder brokers are constantly in the ear of companies exhorting them to raise capital???
Likewise big potential shareholders prefer a placement to having to buy in the market as they can get set for volume without having to push the price higher.
On top of the placement fee, a broker may be able to cajole a company into issuing shares at a big discount, taking stock on his own book, and flipping it quickly afterwards to augment his profits. Let's say a stock is trading as high as $2.23 after the Grunenfeld deal, or at $2.18 the day before a placement at $2 and the broker keeps 5% of the placement (or 1.875m shares) for himself (or "friends") -he could make another $338,000 to $431,000 profit for himself if it gets back to those previous prices. If not, he sells as fast as possible at $2 or better and still keeps all of the $3m placement fee.
I'm not saying that happened in this instance - the discount really wasn't big enough and brokers usually try to force as big a discount as possible to guarantee they'll clean up when the shares start trading again above the issue price.
So, that's a positive, that MSB could demand only a small discount (virtually no discount at all) to where the price was trading pre-announcement and it indicates there was some real demand from instos to backstop the deal. However, it doesn't stop profit taking from some of the loose holders - and there will always be some loose holders in a deal like this. The broker will tell the client that it's all going into the hands of strong holders with demand for more stock - but you'd have to live in fairy land to believe that!
4. Profit taking post Grünenfeld rise
As well as indigestion from the placement, we are currently copping some profit taking from the 50%+ price rise after the Grünenthal announcement. The price rose from $1.45 to $2.23, supported by good volumes and increased buying. Shorting actually fell during that period, so the selling was from stale longs who had been waiting a long time for a profit.
Many of the stale longs would now be in profit and are probably relieved to be able to sell and move on. Many would be in around $1.58 to $1.63 (the volume weighted average price of the past 1-year and 3-years) - so they are still sitting on profits of 17.8% to 21.5% at today's closing price of $1.92.
We may have hoped that the price would rise rapidly to $3.40 like it did in April 2017, however the placement has probably scuppered that possibility in the short term, particularly while there is still profit taking and new prospective buyers have been filled with placement stock.
5. Why are the shares trading below the "over-subscribed" placement price?
It is standard practice amongst competitive instos to ask a broker for up to twice the number of shares they actually want (sometimes more in a really juicy deal). The book is then over-subscribed and the broker allocates cutbacks.
This particular deal wasn't that juicy in terms of a discounted share price, but did give an opportunity to new funds to build a position without having to push the price higher - so there were some perceived advantages in getting a good allocation. Of course, those who waited can now buy stock cheaper than the placement price ($1.92 vs $2.00) - but they can take their time and average down when it appears that the price has stopped falling.
So, why aren't they buying now in the market? Well, those who bid for more than they wanted were probably "cut back" and have all they need. Those who really did have appetite for more are probably waiting to see where the price settles before moving back in to buy - why show your hand when you can average down as profit takers continue to push down the price? M&G only received $A10m in this placement when they had previously indicated they would take up to $US15m ($A22.2m) under a subscription agreement - ie a 50%+ cutback. That could indicate M&G will buy another $A12m of stock in the market if the price trades significantly weaker than the $2 placement price - a smart move on the part of M&G.
As I said earlier, the placement has taken the steam out of the price in the short-term, but should have very little impact long-term.
6. Was the discount 3.15% or not?
The $2 placement price was quoted as a 3.15% discount to the 10-day VWAP. Well, who died and made 10 days king? It would be just as valid, or more valid for an insto looking at the downside price risk in a placement to look at the lowest traded price in the few days or week prior to the placement. That low point was $2 - that's your baseline - so that is where the instos and underwriting brokers want to start from, and hopefully get a further discount on that price. The closing price on Fri 27 Sep was $2 and the opening price on Mon 30 Sep was $2 the day before the announcement of the placement (before closing at $2.14 that day).
So, even though the price had been $2 on the day before the placement and the next two days saw huge falls on the US and Australian sharemarkets, the instos still stepped up at $2 for the placement. I'd argue that wasn't really a discount at all.
It was a pretty amazing outcome for a small cap stock outside the ASX200 which is still burning cash to raise 7.5% of its issued capital at effectively no real discount when the Australian and international markets were plunging. I think that's a good reason to hope that there will still be some fairly solid support for MSB once this current correction is over.
7. Short selling isn't an issue - no evidence of downward price manipulation
There's no evidence that shorts have been playing a big role in any of the recent price moves. They haven't been short selling to push the price down and they have only been steadily but very slowly buying back the net short position over the past month since the Grunenthal announcement.
There's still "limited" availability of stock for lending - ie even if the shorts want to borrow and sell MSB, they can't get access. The net short position has marginally fallen from 27.5m shares on 4 Sep to 26.2m on 3 Oct, down around 60,000 shares per day.
That net buying back of 60,000 shorts per day is a small positive for the share price, but there is plenty to go. At that rate, the shorts will take 436 trading days to cover, or 1
3/4 years. That's a lot of pain iof the share price continues to steadily rise over that period. If they attempt to cover quicker, they'll drive the share price dramatically higher and cop their losses much more quickly. Either way, they face heavy losses, it's just a matter of how much they lose and how quickly.
Bottom line
I really can't see any evidence of share price manipulation in the past month or so (beyond a suspicious looking spike in the price the day before the stock was suspended for the capital raising). To me, it looks like the selling that has pushed the price down is normal profit taking after the Grünenthal price rise and some indigestion post the placement.
It is a pity that the placement hit when it did, as the price was right in the zone for ASX200 index inclusion (around $2.15 post placement) - so hopefully the profit taking ends soon and the price recovers, as it needs to average that price for 6 months and the clock has already been ticking for 1 month.
I believe that there is latent buying from some of the funds who took up the placement (such as M&G) but that they are waiting to see how much further the price falls due to profit taking and loose stock from the placement being shaken out from those who were looking for a quick profit.
The price fall to-date is mild in relation to the previous rise and it should be expected that the share price will fall back to the capital raising price (or a few cents less) - that is completely normal. In fact, in Fibonacci terms, a pullback to anything above $1.75 would still be in the primary uptrend of the move post Grunenthal from $1.45 to $2.23. I'm not saying it would go that low, but I wouldn't be concerned if it did. It would be a perfectly normal 61.8% correction to such a big rise.
Share prices just reflect supply of and demand for stock in the short term - they are independent of fundamentals or valuation. We are moving through one of those periods at present. Over the longer term fundamentals and valuation come into play, and on that basis we have plenty of upside yet to go once this correction is over.
The upside over the next year or so is the BP valuation of $5.03, and that is justified (and more) on all the partners and trial results already obtained. Further upside comes from more deals like Grünenthal - which could potentially take the share price to nearly $20 IF similar sized deals are done on US Chronic Lower Back Pain and on US and
and European
Heart Failure markets. Tasly in China is also potentially a blockbuster market. We will probably need to wait until trial results are announced in these products in the first half of 2020 before large partnering deals are signed, but the upside potential is tremendous.
Meanwhile, we have over 2 years of cash runway and plenty of time to strike good partnering deals. I believe we could potentially see a share buyback in the next 12 mnonths if there are further big deals done, as MSB would not need such huge cash reserves.
ASX200 Index inclusion would also be a big positive. It is almost guaranteed to enter the index in March 2020 if the price can average around $2.15 for the 6 months to Feb 29 next year. Hopefully the price can climb back up to $2.15 fairly quickly to ensure index inclusion (actually, because it has averaged $2 for the past month, we probably need $2.18 for the remaining 5 months).
Hopefully this current share price pullback is just a breather, similar to the first pullback post the 2010 Cephalon deal, which ultimately saw the share price triple!