The Life Sciences Report: Dick, it would be interesting to understand a little bit about GVC Capital and its business model. Would you briefly speak to that?
Dick Huebner: Our focus is on raising money for micro-cap companies. Generally, we prefer companies that are already public, because our investors then have some comfort that there is some liquidity in their investment.
TLSR: I'm looking at three public companies that you follow, plus one that is going public soon. These companies have very tiny market caps. How do companies of this size fit into investors' objectives?
DH: When we raise money, we rely on exemptions from registration, and that necessitates finding accredited investors for these securities. We believe that somewhere between 10–20% of an investor's portfolio can be in speculative securities. While we do our best to evaluate management, the ideas that they bring to us, and the potential for their products, investments in small companies are risky. Because of their speculative nature, we think investors should hold a number of these companies within their portfolios. That way they can participate in some of the winners, knowing that they may also catch a loser or two.
TLSR: An accredited investor is one who has sufficient net worth, liquidity and sophistication. Does that hold true for your target investor even after a company's shares have been floated?
DH: Yes. We focus on investors who have financial staying power and can hold the investment for some period of time. These companies carry varying degrees of risk, in part based on liquidity of shares. Obviously, while there can be liquidity issues in micro-cap companies' securities within the market, individuals willing to accept that risk can participate in owning these companies and the opportunities they present.
TLSR: Do you rely on your investor clients for additional investment in these companies?
DH: Generally, we project a company's capital needs for a 12–18 month period and establish a minimum in a capital raise to get them through that period of time. Whether we can go out to the existing shareholder/investor base for a subsequent offering depends on management's execution in the past and the opportunity ahead of it.
TLSR: These tiny micro caps are a kind of venture-capital opportunity for public investors, aren't they?
DH: Largely, they are.
TLSR: What do you look for in a company?
DH: First, we are industry-agnostic. We look at management, and we do pretty significant background checks. We like operators who have been successful with previous ventures. Regardless of how good an idea is, if a company doesn't have good managers, a very good idea—or even an excellent idea—can die on the vine.
Then we look at the concept or product. Since we don't have research analysts of our own, we go to friends of GVC Capital who may be in the particular industry of a potential issuer, and ask for feedback on the opportunity. Does management's business plan make sense to them? What do they believe the market oportunity may be for a particular product? We have contacts, friends and associates across a spectrum of industries, and we rely on their expertise largely in analyzing the story and the product's opportunity.
TLSR: There are no analysts at your firm. At GVC you're either a banker or a broker, is that right?
DH: That's correct. And some of us are both.
TLSR: Could we talk about some of your ideas?
DH: Most recently, in the life sciences space, we did a deal for nutritional supplement company, MusclePharm Corp. (MSLP:OTCPK). We recently closed a $12M raise for it, which is at the high end of the range that we can raise for a life sciences deal. We've done a couple of $18M deals for natural resource companies, but $12M as a sole book manager of an offering is about the top of our capacity in this space. But MusclePharm was growing very fast, and it had significant events in 2012 that impacted its valuation and made that capital raise possible.
"We believe that somewhere between 10–20% of an investor's portfolio can be in speculative securities."
We did the offering in January and the deal closed at the beginning of February. The company had about $65M in sales for the trailing 12 months and a $12M premoney valuation, in an industry where companies typically trade at about 1x revenue. There was a lot of interest in the company, and the deal was significantly oversubscribed.
MusclePharm's management team is particularly good at building a brand, and had been doing a great job of marketing. Though the managers had not been able to show they were capable of producing a profit, they did demonstrate a willingness to move toward that goal, which gave us the comfort we needed to raise money. With a focus on driving profitability and continuing to grow sales in 2013, we thought it was a very good opportunity for investors.
TLSR: I'm just wondering, with the nutritional supplement market being so crowded, what did you see here that made you want to take part in this company?
DH: Here in Denver there have been a few companies that have been pretty successful with that type of product. A company called EAS Sports Nutrition was built and sold (to Abbott Nutrition, a division of Abbott Laboratories [ABT:NYSE]). A retailer of nutritional supplements actually named BodyBuilding.com was sold to Liberty Media Corp. (LSTZB:NASDAQ. A nutritional supplement company by the name of LifeVantage Corp. (LFVN:NASDAQ) also has been pretty successful for investors. With that experience, the low valuation relative to its competitors, and the fact that MusclePharm had grown 400% year-over-year for four years in a row, a very compelling story had been created.
TLSR: Dick, MusclePharm has some tremendous sales channels— GNC Holdings Inc. (GNC:NYSE), Dicks Sporting Goods Inc. (DKS:NYSE), Amazon.com, Inc. (AMZN:NASDAQ), Vitamin Shoppe Inc. (VSI:NYSE), Bally Total Fitness (private), just to name a few. Are these sellers in any way incentivized to promote MusclePharm's products?
DH: Not generally, though promotions run from time to time. But I do think it's important to talk about the company's unique business model. MusclePharm never puts its hands on the product. It is a marketing and product development company. Its management has structured the company so that production, the financing of the raw materials and the filling of customer orders are all done by the manufacturer.
TLSR: So there are no selling, general and administrative expenses.
DH: The company does have some expense in that category. MusclePharm also has a very significant amount of marketing expense, because it builds product awareness in the marketplace. A large percentage of its sales are done on the Internet, with lower costs. The business model has allowed management to focus on product development and marketing the brand.
TLSR: What differentiates MusclePharm?
DH: As an investment today, it's history versus the future. Previously, the company had difficulty driving a profit. The controls being put into place, and management's commitment to adhere to these controls, is the differentiator. Gary Davis (previously of BodyBuilding.com) became the chief financial officer in July 2012. He put pricing and expense controls in place that created better margins for the business. I believe those controls will better enable the company to produce a profit.
TLSR: Would you go to the next company, please?
DH: Omni Bio Pharmaceutical, Inc. (OTC: OMBP) is a company we've been involved with for more than five years. We've been through three different management teams in that time. We've raised more than $9M over a period of five years.
"If a company doesn't have good managers, a very good idea—or even an excellent idea—can die on the vine."
Omni has exciting science and results around an existing drug with a pristine safety record. The product is a plasma-derived alpha-1-antitrypsin (AAT). It's currently extracted and purified from the blood by four manufacturers. Historically, AAT has been used to treat emphysema; the cost is in the neighborhood of $100,000/year because of the extraction process.
A scientist by the name of Lee Shapiro believed the drug also had anti-inflammatory qualities. It took him a while to get an audience for this application, and it's taken us a while to raise a sufficient amount of money to prove it up in both the lab and in humans. In preclinical studies we have seen some success in treating several diseases, including type 1 diabetes, graft-versus-host disease and gout. Other autoimmune diseases may also be treatable with AAT, such as rheumatoid arthritis and lupus.
Omni's current chief executive officer, Bruce Schneider, who came on board on Jan. 1, 2013, is one of the best managers you could ask for in a small biopharma company. His background includes 35 years at Wyeth Research and then Pfizer Inc. (PFE:NYSE), where he spent a large amount of time as the number two person in charge of new products. He came out of retirement to take the position with Omni because of what he believes about the potential of the company's science.
TLSR: The company's science is very interesting. The theory is to take AAT, as you say, and make it into a fusion protein, which is what Enbrel (etanercept; Amgen Inc. [AMGN:NASDAQ]) is. AAT has been used for a long time, but as a fused protein it could be as much as 40 times more powerful, which is what I understand.
DH: That's correct. And the company may be able to provide the drug much cheaper.
TLSR: It appears this company is three or four years away from clinical proof of concept. I wonder if it should be a public company—if Bruce Schneider might think about taking the company private. If taken private, investors could get a double or a triple overnight, and then the company could do the business of preclinical development without talking to investors every quarter.
DH: It's hard for me to know what might motivate Schneider in that regard. I know the company is going to need funds down the road to further develop its science. The interest for us and for our investors is in the potential liquidity of this investment. Investors don't want to be a minority shareholder in a private company. Also, we at GVC generally need a public vehicle to raise money. That is not to say that at some point somebody may want to take one of the company's assets private.
TLSR: The company has an $11M market cap. What do you think Omni could achieve in valuation as a public company?
DH: The science is very exciting. I've listened to a couple of current shareholder presentations in which the company has said that with success with the recombinant version of AAT, it has the potential to be worth hundreds of millions of dollars. We need to find individuals to continue to fund Omni, people who are willing to take the risk of zero return for the potential of a very large multiple return. We've had success at this in the past, but it's hard to go back and ask for more from existing shareholders who have already put money in at higher prices.
TLSR: Could you talk about another company?
DH: I've known about VolitionRx Ltd.(PINK:VNRX) for about 17 months. It has a very interesting science surrounding nucleosomes, which are wrapped around DNA. As cells die, cell structures are recycled and nucleosomes are recycled in the blood. As a cancer grows, cells are being created and dying at elevated levels, leading to a higher level of nucleosomes in the blood. Thus, looking at nucleosomes can potentially identify cancer within a person. Nucleosomes also carry markers that can tell researchers where they came from, potentially identifying the type of cancer a patient might have.
Initial clinical tests of the company's Nucleosomics (branded NuQ) technology have been performed on 100 patients. The tests properly identified patients with cancer in 76% of those presenting colon cancer, 100% of those presenting lung cancer and 96% of those presenting with breast cancer. It had a false positive rate of about 10–20%, which is fairly low. What's particularly exciting is that the company believes its technology is able to identify targeted cancers in stage 1 and stage 2. Because VolitionRX is a small company, it is focused on only four different types of cancer initially—colorectal, lung, breast and pancreatic cancers. It needs to raise money for its next round of clinical trials.
This is a diagnostic product company, and as such its path to product marketability is much shorter than that of a drug development company. It could have a product on the market for research labs in Europe in 2014, and initially file for 510(k) device approval of its diagnostic within the next 12 months, looking at potentially marketing the product to research labs in the U.S. in 2015. Those dates are quite speculative, but if its trials go well, that would be the timeline.
TLSR: I don't quite understand Volition's scientific model. Is this to diagnose cancers that are yet undiagnosed?
DH: Potentially. Also, it could be used for individuals that have been treated for cancer to determine a recurrence.
TLSR: As part of a routine exam?
DH: Correct. It could be used in routine exams or physicals. A very small blood sample is all that is needed. An additional market is for people who have had cancer and are going to the doctor at three-month, six-month and one-year intervals for follow-ups to see if they have recurrence. The VolitionRX test is very inexpensive, and could potentially be run by patients at home.
TLSR: You're working with one private life sciences company that is going to go public soon. Can you talk about it?
DH: The company is Arrogene Inc., and it has an interesting technology. Arrogene is working on the direct delivery of a drug to tumors. The platform is targeting brain cancer, lung cancer and two types of breast cancers. Arrogene believes it has developed a molecule that can penetrate the blood-brain barrier, which is pretty exciting to think about. The chairman of the scientific advisory overseeing the lab is Keith Black, a world-renowned neurosurgeon specializing in brain tumors. He's chairman and professor of the department of neurosurgery at Cedars-Sinai Medical Center. Arrogene has a number of scientists working on this technology at Cedars-Sinai, and it holds a lot of promise. The company is looking to be public in the not-too-distant future.
TLSR: Thank you, Dick. It's been a pleasure.
DH: Thank you very much, George.
Richard Huebner is senior managing partner at Denver-based GVC Capital and a member of the firm's Commitment Committee, which makes the final decisions on all the banking deals. Huebner joined GVC Capital in October of 2001 in a management capacity to plan and facilitate its growth. He has been in the securities industry for nearly 30 years. His experience includes serving as general counsel for Hanifen, Imhoff Inc. from January 1984 through September 1995. While at the firm, he served in numerous positions, including executive vice president, director and member of the executive committee of Hanifen, Imhoff Holdings Inc. In 1995, Huebner became an executive vice president, director and member of the executive committee of Hanifen, Imhoff Clearing Corp., which was sold to Fiserv Inc. in December 1997. He continued in those capacities for Fiserv Correspondent Services. Huebner received a bachelor's degree in economics and business administration from Hastings College, and a juris doctorate from the University of Nebraska.
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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: MusclePharm Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Richard Huebner: I or my family own shares of the following companies mentioned in this interview: Omni Bio Pharmaceutical Inc., Arrogene Inc., MusclePharm Corp. I personally or my family am paid by the following companies mentioned in this interview: None. My company has had a financial relationship with the following companies mentioned in this interview: Omni Bio Pharmaceutical Inc., Arrogene Inc., MusclePharm Corp., VolitionRX Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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