by Jozef Fujka

WBP Online

New York — A recent bubble in the biotechnology sector from the beginning of the year — especially in small cap and nano cap companies with very low floats — is causing absurd valuations for a few names. These bubbles are the same as seen in the past, created by speculative capital and unrealistic expectations, mostly from retail investors.

Cormedix is one such small cap company that has been pumped heavily to an insane level, fueled by the speculation of their new drug — Neutrolin — being approved for US markets. The drug has been on sale across Europe since December 2013 and is awaiting successful phase 3 testing before becoming marketable in the US. At the beginning of 2015, investors valued the company at $35 million. Three months later the market cap reached $9 per share, or an absurd $185 million, while the company is burning an average of $7 million in cash a year.

Overreaction to catalysts

Behind investor willingness to invest in this money burning overvalued company are several positive developments for the business which are summarized below.

- On December 3 Cormedix obtained an expanded label for Neutrolin in Germany, which was followed by a similar expansion in the EU on September 22. As a result of these expanded labels, CRMD filled patent infringement suits against TauroPharm, a manufacturer of a similar device in Germany.

- On January 15 the firm received the go ahead from the FDA for the fast track of Neutrolin, followed by receipt of a QIDP designation on January 29, which potentially extends patent exclusivity by five years.

- Finally, the company received backstop financing. This allows the company to borrow up to $3 million in the event that certain warrants aren’t exercised.

All these events were very welcomed by investors which led prices to more than quadruple in a very short time and resulted in the following valuations:

Market Cap: $185 millions

Enterprise Value: $177 millions

Price/Sales ratio: 1,618.03

Price/Book ratio: 30.92

Ent. vaule/Revenue: 1,664.56

Ent. value/EBITDA -21.50

These valuations are supposedly justified by the firm’s very bright future and outlook (which unfortunately the company just does not have), or maybe as mentioned by the bubble and speculative investment capital.

Weak balance sheet

As of September 30, the company only had about $5 million in net assets available to operate its business. Moreover, the recent cash spend was greater than previously expected, and so in its 424B filings the company commented:

Based on our expected cash resources at September 30, 2014, we previously believed that existing cash would be sufficient to enable us to fund our projected operating requirements into the third quarter of 2015. Due to higher than anticipated costs in sales and marketing to support oncology label expansion, increased business development activities, increased legal costs to defend our intellectual property and additional research and development activities to support product registration and future commercialization initiatives, we believe that our expected cash resources as of December 31, 2014 will be sufficient to enable us to fund our projected operating requirements into the second quarter of 2015.

However, we may need to raise additional funds more quickly if one or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate, and we may decide to raise additional funds even before we need them if the conditions for raising capital are favorable.

This uncertainty about the company’s ability to raise cash led to a warning. However, once again the company announced in their 424B SEC filings:

We anticipate that our independent registered public accounting firm will express substantial doubt as to out ability to continue as a going concern and may do so again in future.

Based on our expected cash resources at December 31, 2014, we believe that existing cash will be sufficient to enable us to fund our projected operating requirements into the second quarter of 2015. As a result, we anticipate that in their report to accompany our audited financial statements for the year ended December 31, 2014, our independent registered public accounting firm will express substantial doubt as to our ability to continue as a going concern. A ‘going concern’ opinion could impair our ability to finance our operations through the sale of debt or equity securities or through bank financing.

Our ability to continue as a going concern will depend, on our ability to obtain additional financing. Thereafter, our ability to generate positive cash flow from operations will depend on our ability to successfully commercialize Neutrolin, which is uncertain. Additional capital may not be available on reasonable terms, or at all. If adequate financing is not available, we would be required to terminate or significantly curtail our operations, or enter into arrangements with collaborative partners or others that may require us to relinquish rights to certain aspects of our technologies, or potential markets that we would not otherwise relinquish. If we are unable to achieve these goals, our business would be jeopardized and we may not be able to continue operations.

As a result of this lack of cash, the company will very likely proceed and initiate a secondary share offering as dilutive financing, and according to another part of the 424B filling:

We will need additional financing to fund our activities in the future which likely will dilute our stockholders. We anticipate that we will incur operating losses for the foreseeable future. Additionally, we believe we will require substantial funds in the future to support our operations. We expect to seek equity or debt financing in the future to fund our operations. The issuance of additional equity securities, or convertible debt or other derivative securities, likely will dilute some if not all of our then existing stockholders, depending on the financing terms.

Marked cap and stockholders

It is hard to imagine how five employees could justify a company valuation of $185 million. Even harder to imagine is how five employees could justify an even larger marat cap.

If dilution happens it will massively increase the company’s market cap. According to the SEC fillings to December 31, 2014, the company had 22,461,668 issued stocks. That puts the fully diluted share count at 45,087,262. At $8.06 a share that comes to a fully diluted market cap of about $372 million. Now of course full dilution will be somewhat offset by the cash generated in exercising the various warrants and options, but the overall impact on today’s shareholders will be overwhelmingly negative.

Cormedix price and valuation spike

Daytraders are the ones who have been attracted to a stock that is in a very hot sector and which features a small float. Prior to December the stock typically traded 100,000 shares a day or less, which at a price of $1.25 meant a dollar volume of $125,000. On Wednesday the stock traded 2.8 million shares at a closing price of $8.06, or about $25 million in trading volume. When daytraders move on to their next toy, volume will decline and reality will set in to the Cormedix share price as fundamentals will weigh.

To contact the author of this story, email jozef.fujka@wbponline.com

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