Wednesday, 20 February 2019

Pernix Therapeutics: Buy Low For The Bankruptcy Bounce

Pernix Therapeutics Holdings, Inc. (PTX) has been hammered the past two days. It dropped from $1.14 on Friday (and as high as $2.20 on heavy volume earlier last week) to $0.29 after announcing an asset sale and Chapter 11 bankruptcy. Why buy a stock that is going through bankruptcy? Because the recent trend has shown that companies that tank heavily after announcing bankruptcy recover soon thereafter. PG&E Corporation (PCG) tanked from over $40 to $7 over the past four months but has recovered to trade at $18 since filing for bankruptcy, filling a gap in its chart created on January 14. On the opposite end of the market cap spectrum, EnSync, Inc. (ESNC) shot up 47% to $0.13 today and got close to filling the gap created by its threat of bankruptcy announcement on February 12. PTX has the potential to do what these two stocks have done over the next few days, especially since the Chapter 11 bankruptcy does not mean that the company is done. We are up to 803 followers despite not giving out a lot of alerts, a fact that we think is indicative of a successful, diligent and prudent stock picking history. If you like our picks you can follow our blog by clicking the follow button on the top of the left hand panel. You can also follow us on Twitter @StockTradePicks. We have over 3,600 followers on Twitter as well.

PTX dropped after announcing the following:

MORRISTOWN, N.J., February 19, 2019 (GLOBE NEWSWIRE) – Pernix Therapeutics Holdings, Inc. (NASDAQ: PTX) (“Pernix” or the “Company”), a holding company that owns several subsidiaries, including specialty pharmaceutical companies, today announced that it has entered into an Asset Purchase Agreement with certain funds managed by Highbridge Capital Management, LLC (collectively “Highbridge”). The Agreement serves as an initial “stalking-horse bid” to acquire substantially all of the assets of the Company and its subsidiaries, including the rights to all branded and generic products (the “Products”), for approximately $75.6 million in the form of cash and credit bid consideration. The Agreement is subject to court approval and a competitive auction process.

Pernix has also initiated voluntary proceedings under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware to undertake its restructuring and sale process. The Company and its subsidiaries fully intend to continue operations while the Company works to complete its sale and restructuring process. Pernix has obtained a commitment from Highbridge for debtor-in-possession ("DIP") financing of approximately $29.1 million, with an additional accordion facility of $5 million. Proceeds from the DIP financing, in addition to cash flow from operations, will be used to ensure that the Products remain available to patients and will otherwise fortify the Company’s balance sheet.

"We believe that pursuing this restructuring and sale process is in the best interest of the Company and our stakeholders,” said John Sedor, Chief Executive Officer of Pernix. “It allows us to ensure that patients continue to have uninterrupted access to our life-changing medications and patient support services while also allowing Pernix to address its financial position.”

Closing of the proposed transaction is subject to the receipt of applicable regulatory approvals, the satisfaction or waiver of other customary closing conditions and Court approval.

The Company is working to conclude the sale process by or before May 2019."

The bid for substantially all of the company's assets was $75.6 million, which is well short of the $150 million of intangible assets and goodwill on the balance sheet, and short of $447 million of total liabilities. But this "stalking horse bid" is by definition, like a minimum bid you see on an eBay auction. This bidding process will last for at least three months. PTX's total market cap is only $4 million. This is a very low valuation to bet that the bids will increase substantially from there. We think market participants will feel the same way that this bankruptcy news was an overreaction and the stock price will have a substantial dead cat bounce like PCG or ESNC.

As part of the press release, the company released a presentation that included a financial summary:

We see that EBITDA including the Nalproprion minority interest is expected to be $15 million in 2019. The Nalproprion minority interest alone is expected to be $8 million annually in EBITDA going forward. A 10x multiple leads to an $80 million valuation just for this piece, already more than the first offer for the entire portfolio.

PTX management forecasts a $40 million gross margin annually for the rest of the business. But then forecasts over $40 million for G&A, sales and marketing expenses so EBITDA is shown to be a loss in outer years. There is absolutely no way that this portfolio needs that much in sales and marketing if they are going to allow it to flatline like that. That $40 million in expense could easily be cut in half and all of a sudden this alleged money-losing enterprise will make $15 to $20 million per year. This portfolio is worth in excess of $100 million. How much it goes beyond that will be dependant on a bidding war. But already we can see the bid for all the assets surpass $200 million before this process is over.

Thanks to years of operating losses, PTX has accumulated $66 million in deferred tax assets which currently is fully offset by a valuation allowance. If PTX was to sell all of its operating assets and exist as a shell, that shell's tax assets have value in the instance of a reverse takeover that is done in a way to not invalidate them. This article gives a good overview of this process.

We think that PTX offers a good near-term bullish trading opportunity on oversold technicals, a larger market that has been consistently giving large bounces to companies that tank after announcing bankruptcy and an ongoing news flow that should occur as multiple bids come in as this first one is obviously too low. Any stock has risk to it, especially one that is in bankruptcy proceedings so investors should trade accordingly.

Disclosure: We are long PTX

2019 got off to a reasonable start in January for microcap stocks as the market in general was bullish for the month. There were a lot of stocks that spiked 100-500% in a matter of one or a few days. As we look towards the rest of 2019, we have to figure out what's next for microcap stocks? TradeMiner identifies seasonal trends and market cycles, the Penny Stock Prophet and Microcap Millionaires finds the next big small cap plays in various industries while Addicted to Profits makes trades from a Canadian perspective.

There are also some good books available on microcap stocks and day trading such as:

Mastering Microcaps: Strategies, Trends, and Stock Selection (Bloomberg Professional Library)

The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks

Microcap Magic: Why The Biggest Returns Are In Stocks You've Never Heard Of

How to Day Trade for a Living: A Beginner’s Guide to Trading Tools and Tactics, Money Management, Discipline and Trading Psychology

How to Day Trade: A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology

A Beginner's Guide to Day Trading Online (2nd edition)

Stock Investing for Beginners: Marijuana Stocks


Here are some other good stock market resources. This includes technical analysis and day trading, dividend stock investing, gold and commodities, sector rotation, options trading and microcap trading strategies:

The dividend stock report from dividendstocksonline.com

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