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pSivida Is a Microcap Worth Watching

03/08/2007 12:00 am EST


Neil George

Editor, Profitable Investing

Ticker PSDV

Neil George, editor of Personal Finance, says Australian microcap bionanotech company pSivida can move up if it manages to cut debt and hook up with a big-pharma partner to license one of its products.

First the stock was driven down by its new placement deal; then the whole Asia meltdown stomped it again. Fear not; we had a talk with an official of pSivida (Nasdaq: PSDV ; $1.60) last Friday, and he filled us in on what should be an encouraging March. (The bionanotech company has no earnings and a market capitalization under $100 million—Editor.)

Regarding the new placement deal, this financing has given pSivida more working capital that it can use as it chooses and has eliminated any need to share royalties with Nordic Biotech, a long- and short-term plus.

The first stage of the Nordic deal would have given pSivida $2.9 million initially for stock, options and a piece of royalties on Medidur applications for diabetic macular edema (MDE). And those monies could only be spent on Medidur MDE-focused projects.

The new deal puts $9 million in the company’s coffers on a straight stock-and-options deal that has no royalty kicker and no restrictions on capital use. The price of the offering is equivalent to $1.70 a share for the US American Depository Receipt, the same as the Nordic pricing.

But this isn’t the issue that’s holding the stock back. There are two pieces to this puzzle that need to be reconciled before this company and its stock start to move in the direction we've been waiting for. First, it needs to land a big-name company to license one of its products to establish credibility and cash flow. Second, it has to clear some of the debt off its books that's been a millstone around the neck of the stock--especially the $12.5 million convertible note that’s sat there for more than a year.

It just so happens that March may be the month where both these issues are resolved. pSivida is in negotiations with a big global pharmaceutical company for exclusive licensing rights to an aspect of pSivida’s drug delivery technology. If it all pans out, the company would get an up-front payment that would partially be applied to the outstanding $12.5-million note, reducing debt overhang, which has been a big sticking point to institutional investors’ interest in the stock. And signing a big pharma would credentialize the company’s technologies, boosting its attractiveness across the entire investment spectrum.

pSivida would transition from a debt-laden, development-stage company with some good ideas to a debt-free nanobiotech with an impressive drug delivery pipeline. That’s worth a few pennies on the share price. Also, the J-coding for Retisert by Medicare and Medicaid has helped boost sales, and the March numbers will reflect that development.

Is there risk here? Yes. But does the opportunity outweigh the risk? Absolutely.

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