- Motif Bio failed to get its novel antibiotic approved in the US leading to the eventual collapse of the company
- Investors have voted to reject a reverse takeover that might have rescued the company, but given too much to the existing directors
A few years ago, I recall that Interserve (IRV) – now delisted – proposed a deleveraging plan that would see existing shareholders’ equity reduced to 5 per cent of the company.
The situation at Interserve left investors with little choice, but one shareholder – Coltrane Asset Management – did not agree with the plan. Despite the belief that administration would follow if the deleveraging plan wasn’t voted through, Coltrane still voted against it. Administration followed and everyone lost everything.
This isn’t supposed to happen. Coltrane would clearly be better off holding 5 per cent of something than 100 per cent of nothing. Yet they voted against their own interests. Why?
Because markets are not always efficient. Humans are not always rational; humans are emotional. And with those emotions come a whole load of other things: greed, fear, euphoria, desperation, jealousy, anger and spite. Coltrane hurt itself to hurt others.
It happened again this week at Motif Bio (MTFB). The company was due to go through a reverse takeover that would heavily dilute existing shareholders, but the necessary resolutions weren’t passed and the stock delisted. I had hoped to join the shareholder register as part of this deal, but will likely gain exposure to the company through an IPO in a few weeks instead. The existing shareholders were not happy with the directors (in particular, one Twitter user making the point that shareholders were getting a 220:1 consolidation and a director was getting 2 per cent of the new company) and voted to lose everything.
Their emotions are, of course, entirely understandable. For private investors who have almost lost everything anyway, losing the last part of their holding in an attempt to stop directors who have failed them getting meaningful amounts may be a fair trade. But it does go against the efficient market hypothesis. However, Motif Bio – which specialised in the development of novel antibiotics before a catastrophic trial failure – has been a great share to trade over the years. Volatility was kind to this stock even if its fortunes weren’t, and so it has always paid to keep an eye on the story.
Chart 1 shows the stock’s price chart as it traded through 2017. I have marked two arrows on the chart with the left arrow being the first readout of the two phase III trials that year: REVIVE-1. The second arrow marks the date that REVIVE-2 was successful.
The first arrow shows that the stock price had already started moving before the trial results were released. This can sometimes suggest that insiders know the result of the study, but both REVIVE-1 and 2 were double-blind trials meaning neither patients nor scientists knew who had taken the medicine or placebo, making it incredibly difficult for anyone to get an inside track.
Price moves like this can also be attributed to punters buying and taking a gamble. The motive here is to be in early, wait for the price to gap, then sell into oncoming buyers who are buying post-news announcement. But this assumes that the news goes your way – we’ll see later in this article what can happen if it doesn’t.
Despite the initial sell-off, the price rallied and pushed past this prior high. One problem at the time was that the market knew a fundraising was likely as the company’s coffers were depleted. This put pressure on the stock price because everyone knew the company needed cash, therefore there was no incentive to buy before the placing. The situation also allowed people to short the stock and close after the placing or even in the placing. I have no doubt that some investors and institutions do trash the price knowing they’ll be able to close out in a placing down the line. This is why it pays for a company to have ample cash in the bank because it protects it from this type of behaviour.
REVIVE-2 was a copy of REVIVE-1 only in a different location – meaning that unless the results from REVIVE-1 were a complete fluke it was clear that REVIVE-2 would see a positive data readout too. This is what happened and we can see a large price gap up with monster volume the day the news was released. Candlesticks on large volume are more significant than candlesticks on meaningless volume. Volume shows action in the market, and the more action there is the more likely it is to be consistent with the overall sentiment of the stock. A few small sells can mark a stock down and give it a small candle, but a large candle on heavy volume shows some real selling. We can see a huge shooting star candle on the day of REVIVE-2, which gave everyone a clear warning about the sentiment of the stock.
I exited my position on REVIVE-2 and took my profits. At the time, I remember thinking that I may be selling too early. But it’s always better to sell early than late. Take your profits, or someone else may take them for you.
Drugs trial success doesn’t automatically result in approval. The Food and Drug Administration in the US rejected the company’s antibiotic and its share price eventually collapsed nearly 90 per cent on this news. There are never any guarantees with pharma, but if you can time your entries and exits well there is always money to be made.
Following on from last week’s name and shame, this week’s award goes to FTI Consulting for arranging a sell-side analyst call shutting out private investors at On The Beach (OTB).
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