A very recent example is Futura Medical, the latest small company to suffer the curse of the failed licensing deal. Its agreement with SSL for erection-enhancing condom product CSD500 should have proved a winner, with Futura's technology complementing SSL's unbeatable brand recognition with Durex. Unfortunately, a series of regulatory problems delayed the product's launch, during which time SSL was acquired by Reckitt Benkiser which promptly canned the project and handed back CSD500's rights to Futura earlier this month. The share price halved in response.
That sounds disastrous, but not if Futura follows the example of Vectura, which suffered a similar predicament when the US rights to its VR315 product were handed back by Novartis' generics arm Sandoz. In Vectura's case, just after Sandoz handed back the rights, it started to earn large-scale milestones on other products and the resulting increase in its cash-pile helped to stabilise investor sentiment. Indeed, investors who bought Vectura's at 33p, after the Sandoz announcement, are now sitting on a paper-return of 150 per cent.
A variation on this theme is how third-party companies can seriously damage investor wealth. That is what happened to Prostrakan back in September 2010 when third-party manufacturing problems with its Sancuso anti-nausea product scuppered its full-year predictions and cost then chief executive Wilson Totten his job. The shares plunged to lows of 44p, but the high-risk investor would have made a massive profit buying in at that point as Prostrakan recovered enough to be be bought out by a Japanese company in a £292m deal worth 130p a share.
That leads onto thinking about how to profit when everyone else is running for cover.
When researching a special investment situation in healthcare, it is worth keeping in mind the following rules:
1) Just because a product is dumped by a larger company doesn't completely invalidate it. Often, bigger partners are beset by internal politics when it comes to developing products brought in from outside the R&D machine. Stories of products filed away and forgotten in big companies after a restructuring are legion.
2) The company has to have enough money to survive. The likes of BTG, for example, have suffered reversals but always had enough cash to change direction. Plenty of liquid funds is a good indication that value can be restored.
3) If a company looks, and sounds, desperate for any kind of deal, then stay well clear. Buyers will know this too and put the screws on any final terms.
Healthcare, despite its much diminished status in the UK regularly offers up these kind of opportunities and canny traders will continue to make money from near disasters.
