Amicus Therapeutics, Inc. (NASDAQ:FOLD) just announced a convertible senior notes offering, and the company is trending down on he back of the news. Here at Market Exclusive, we’ve highlighted the company as being one to watch on a number of occasions over the last few months, as its pipeline shifts towards maturity and the potential for upside heats up.
As things stand, on report of the notes issue, Amicus is down circa 10% on its pre announcement market cap. So why are we highlighting this? Well, this is the small cap biotech sector. Equity needs to be raised, and there is only really a handful ways of doing so. If capital isn’t raised, assets don’t move forward through the development pathway, and revenues potential doesn’t get met.
If a company can raise cash in a manner that brings in the goods, but minimizes impact on shareholders, we think it’s a sign of real strength. As such, when we see a company that does the above dip post-announcement, we see it as a market misinterpretation and – in turn – an opportunity to pick up stock at a discount.
Amicus falls neatly into this category right now.
By way of a quick primer, the issue as it exists in biotech, is that companies need money to conduct clinical trials, and at this end of the space, they aren’t generating any substantial revenues, so equity has to be issued to raise the money. As the equity issues, however, it dilutes the current base.
So how did Amicus avoid diluting its shareholders? Well, there isn’t really a way to raise without dilution (when equity is concerned, that is, things like loans etc. that don’t relate to equity are obviously non dilutive) so companies undertake a few different shuffle type maneuvers to minimize dilution. In this instance, Amicus has used what are called capped call transactions. Before we get in to what this means, let’s look at the details of the issue.
Amicus is set to issue $225 million worth of convertible senior notes due 2023. The company also intends to grant the initial purchasers an option to purchase up to an additional $25 million aggregate principal amount of notes on the same terms and conditions. These will only be available to cover over-allotments, however. They are unsecured, and convertible (under certain circumstances) into cash, stock or a combination of the two. Amicus will pay interest on the notes semi annually.
So, capped call. These are a separate transaction run concurrently to the issue (in this instance, with both a number of financial institutions and with some of the options holders) that are exactly as they sound – a call option that is capped at a certain price. If the price of Amicus hits the cap, the call options exercise, and the profit is locked in (but, as the name suggests, capped).
This allows the company to use the call profits to offset any potential cash payments that it is eligible for on conversion of the notes that are being issued and, as described above, reduce any potential dilution on the share base if the holders choose to convert to stock, as opposed to cash.
So that’s the details, what is the money for?
Well, obviously, the capped call transactions cost money. Amicus is going to have to use a portion of the capital raised to fund the purchase of these options. As yet, we don’t know how much, but we’ll find out in the next quarterly filing. The rest, we suspect (the company has only stated it’s for operational activity), is going to fund the development of migelstat in the US. The drug is approved in Europe (where it’s called Galafold) in a Fabry indication, and last month, we got word that that 50 patients are currently being treated, and reimbursed for that treatment as part of an expanded access program. Further, that in the US, we should see a regulatory update on an optimal filing pathway by year end.
Bottom line here this is a sound structural raise, and it’s going to give Amicus an extended run way through which it can bring a number of its lead assets through to commercialization. We’re going to be watching this dip to see if it recovers, and we expect it will.