On May 15th, the Board of XTENT, Inc. (XTNT) announced that it had approved a plan of dissolution. Since liquidations often involve significant uncertainty—particularly concerning distribution timelines—I have found them a fruitful place to look for market inefficiencies. Prior to the announcement, the stock traded at about $1 per share, a price which valued the company at $23.3 million. After the announcement, the stock plummeted to .30 per share, or about $7 million.
Looking through XTENT’s financial statements, one could find relatively meager resources, no sources of revenues, lavish operating expenses, and a host of off-balance sheet liabilities. In fact, in the first three months of the year, the company burned $9.9 million of their $20 million in current assets on operating expenses (remember—no revenues). As of March 31, 2009, the company had $12 million in cash left to burn.
Upon hearing the announcement about dissolution, the prospective investor’s question was: how much will XTENT likely distribute? And when?
By management’s estimation, shareholders would likely receive 11 to 40 cents per share. Yet, if XTENT’s intellectual property could be sold, distributions could be higher.
However, my glance at XTENT’s assets and preliminary proxy suggested that management’s estimates may have been excessively optimistic. Their annual 10-K showed substantial off-balance sheet liabilities that looked well-defined, making management’s “high range” estimates an unlikely scenario. In the month of April, the company had burned $1 million in current assets, suggesting that any delay in the dissolution process would be expensive. Most simply, management’s “low range” estimate of 11 cents per share looked far more likely than their “high range” of 40 cents.
The remaining unknown was the potential sale of XTENT’s intellectual property. Honestly XTENT’s drug eluding stent systems are outside my circle of competence; I had no good sense of how much they were worth. What was clear was that XTENT had hired Piper Jaffray & Co. to help the company explore strategic alternatives in January 2009, and since that agreement, no desirable alternatives had arose. Perhaps the value of intellectual property could be realized, but I doubted that someone would recognize it after the plan for dissolution who happened to miss it before. In fact, most of XTENT’s major competitors in stent technology—Boston Scientific, Johnson & Johnson, Abbott Vascular and Medtronic—had viable stents of their own. I concluded that any value to the intellectual property was most likely nominal.
All told, I thought that XTENT, trading at 30 cents per share post announcement, was likely a much better short candidate than long. It seemed much more likely that XTENT would return less than 30 cents, and over a very long period—perhaps as long as three years. I didn’t short XTENT because it was hard to borrow with my favored broker, and the upside didn’t seem worth the risk.
Of course, some may know how this story ends. Yesterday (June 4th), XTENT announced that the U.S. Food and Drug Administration has granted conditional approval of the Company’s pivotal clinical program for its Custom NX Drug Eluting Stent System. And the stock has soared the last two days—all the way up to $2.69 per share. Though it remains to be seen whether this conditional approval will yield additional interest for XTENT’s intellectual property, XTENT shareholders have enjoyed a stunning 900% gain.
Lesson confirmed—deal with biotech shorts very gingerly, if at all. The FDA is always good for a long “Hail Mary.”
Disclosure: No position.