biOasis: The Storm Before The Calm?

Shares in biOasis have been under pressure for a while, the stock having drifted down from last year’s high of $2.05 to where it’s now sitting at $.78 cents a share (Canadian). As is typically the case, a selloff of this large a percentage is creating shareholder angst. The chat rooms are very active, with vacuous comments railing against the company, management and other investors.

I get it. When shares trade down, that’s money out of people’s pockets…doubly painful when the overall market is trading higher. But, instead of throwing fits and losing one’s patience online, or even worse, selling at a low valuation, investors should be taking a step back and looking at the situation rationally and unemotionally.

There really are two questions that need to be asked. First off, why is the stock down? And, secondly, what should I be doing as an investor? I’ll attempt to answer both those questions here.

Why are biOasis shares under pressure?

I believe the answer here is a combination of two things. First off, biOasis has not met their historical guidance in terms of timelines. Looking back a few years, an investor would have understandably thought the company would be further along by 2017.

This is not to say that the company hasn’t executed or achieved a lot during this time. It certainly has, having developed a peptide that has yet to fail a trial, signing two partnerships and getting a product ready for a Phase Zero study. No, biOasis has performed as a company. The issue is simply that they haven’t performed to the timelines expected by investors.

There are numerous reasons for this failure to meet expectations. And, while I’m not here to make excuses for the company, I believe these reasons are perfectly understandable.

Realistically, drug development takes years. Scientists have been trying to crack the secret of crossing the blood brain barrier for decades. And, biOasis is not totally in control of timelines related to trials. This is often their counterparties bailiwick, and biOasis truly only controls their internal timelines; and they have been spot on with those. I believe that, if you step back and examine the total body of work, you’ll agree that biOasis has accomplished a ton. They have earned a hall pass for timeliness in my book.

The second reason for the weakness in the shares is the rumor of a financing in the works. Check out the chat rooms…everyone believes the company needs to raise money. Whether or not I agree with this is irrelevant. When the investment community believes a company is about to undergo a financing, they avoid buying the stock.

This avoidance is truly a double whammy for biOasis. Because, as mentioned, many investors are disappointed by the company’s failure to meet their expectations of timeliness in drug development. So, when you combine this displeasure by long-term holders with a lack of buyers due to the overhang of a potential financing, the end result is going to be share price weakness. We are seeing this today in biOasis and, until there is clarity on a deal, the stock can find a bottom but will likely struggle to make significant gains even from this oversold situation.

Is there a deal in the works?

This seems to be the big question regarding biOasis shares at this time. If the stock is down due to deal overhang, that makes sense. If it’s down and there’s no financing, expect it to snap back at some point.

So, Is the company looking to raise money? According to the chat rooms, yes, they are. This makes sense as biOasis has said for a while that they require around $3M in order to run a human trial in Australia…a Phase Zero study, as it’s called. If they are indeed looking to do this trial, there will need to be a financing.

On the other hand, company guidance is for a very low burn and for licensing fees to start kicking in any time now. With around a million USD in the bank, a burn well under $100K, and being on the verge of getting seven figure milestone payments, biOasis is under no pressure to get a deal done.

This puts the company in a unique position. They don’t have to do a financing, but might want to do one to fund human trials. If they were to do an offering, the dilution would be around 5 million shares at current exchange rates and trading prices; less than 15% dilution.

It’s really up to biOasis to determine if 15% dilution justifies being in human trials in 2017. If they believe that’s the case, there might well be a financing in the offing. If not, then no dilution coming. With low burn and cashflow starting soon, the company has the luxury of doing a transaction only if they want to.

What should an investor be doing?

Okay, so the shares are down due to frustration and a potential financing transaction in the offing. As an investor, you have three options; buy, sell or hold. I’m not going to tell anyone what to do, but here’s how I look at the situation.

If there’s no financing…this is a simple scenario. The stock is on it’s a**. With the licensing model about to kick in, the value here will be clearly demonstrated over the course of 2017. It’s a no-brainer for me to pick up more shares if I believe management can execute on the vision; which I obviously do or I’d have been long gone.

If there’s a financing deal…this is much trickier. There are three variables at play in the case that a fundraising takes place. First off, where do they price said transaction? Secondly, can I participate on the offering. And, thirdly, what will happen to the stock post any financing? How you evaluate these variables really determines a course of action.

In terms of where a deal could be priced, this is never easy to answer. Shares of biOasis are way down. And, the dilution is not large. Most Canadian financings, in my history, come at very minimal discounts to market, with some warrant coverage. There is no reason to think that won’t happen here. Therefore, I am assuming any transaction comes very close to the $.80 level where the stock has seemed to stabilize on good volume lately.

Secondly, if you can buy on a offering, that’s always best. You generally get a low price and warrants. However, these transactions are private and selling in front is very frowned upon by the security authorities. If you’re lucky enough to get shares in a placement, good for you; I’d be a buyer here, too.

Finally, if and when a transaction is priced, I fully expect to see a rally in the shares. And, it could be quite sharp. This company has many believers in the technology; it has yet to fail in any trial. There is no reason to think that a human trial would be any less successful. Thus, if the company is funded and entering humans, this should be a very positive catalyst. I believe there are many investors sitting on the sidelines (possibly having just sold), waiting to purchase shares after a financing. There could be a rush to get cheap shares post a transaction and many of them may be disappointed.

When to take an item off the sale rack?

biOasis is like an item in Filene’s basement. Filene’s was a department store in Boston. Items that didn’t sell got marked down and went in the basement. Each week, they would get discounted further. If you didn’t buy it one week, it would be cheaper the next…if it’s still there. And, that’s the tricky part, isn’t it? If you LOVE biOasis at $.78, do you hold off thinking it might go to $.70? Or, do you say “Screw it” and buy regardless of the chance that a financing deal is coming.

Picking a bottom in a stock is hard. But, purchasing when it’s under pressure and there appear to be no other buyers is almost always a winning strategy. The funny thing about Filene’s Basement was you couldn’t always find what you were looking for, but anyone who bought there got a steal. Now, I don’t know if this is the bottom for biOasis, but I do believe that years from today anyone who had the vision to look through the current pressure and buy the stock at these levels will be a very happy investor indeed.

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