Tuesday, November 06, 2007

What Price Stock Research?

The Acumen BioFin Division of Rodman Renshaw staged a three-day investment conference the first week in November 2007. On the way to observe a presentation by one of the companies in my coverage universe I wandered through the noon lunch presentation.

As is often the case, my lunch companions were the most informative portion of the program. I had the privilege of sitting next to Michael Tardugno, the CEO of
Celsion Corporation (CLN: AMEX), and one of the company’s earnest directors, Dr. Kris Venkat. Celsion is an early stage biotech developing a heat activated liposome for enhancing the effectiveness of thermotherapy devices used in cancer treatments.

Upon hearing that I am a securities analyst, Mr. Tardugno slipped casually into his “elevator speech” to explain the finer points underlying Celsion's stock. My estimation of him as a steward of shareholder value went up immediately. Many CEOs lack the forethought to even prepare a quick one or two sentence “advertisement” for their company and stock, let alone deliver it spur of the moment when confronted by a potential investor.

As the conversation unfolded the duo “confessed” they had resorted to paid-for research on CLN. They seemed apologetic, so I queried them a bit about the company and the stock.

No they do not need money. Celsion is well capitalized with a new $6.5 million credit facility, $11.3 million in cash at the end of September 2007 and a $30.0 million receivable from Boston Scientific for certain assets associated with the thermal therapy, Prolieve. Even with a cash burn rate near $8.0 million a year, it will be a while before Celsion needs to dip its bucket into the capital market well.

The stock trades "by appointment" as they say, barely mustering 5,000 shares a day in average trading volume. During the first half of 2007, the stock seemed to have some buoyancy and volumes were higher but “spikey” and not consistent. Since then the volume bars barely peak above the base line on the stock chart.

“I understand your situation,” I tell the pair. “No need to qualify or otherwise apologize for your research coverage. EVERY issuer ALWAYS pays for research on their stock. You have no ‘currency’ to purchase research other than hard cash.”

The furrow that immediately appeared on Mr. Tardugno’s brow suggested this might be a new concept to him. I continued….

The most preferred compensation for stock research is trading volume which can easily be converted into commission dollars. The sell side likes this best because it is not a fixed fee. CLN has no trading volume - no currency, no research.

Investment banking profits going into the firm's coffers can still be used to support research activities generally. Contrary to the thinking of some critics of the financial services industry who believe that banking deals and good stock ideas come from two separate and never overlapping pools - good banking deals should be good stock ideas and vice versa. It never hurts to build a body of knowledge about an industry or sector. Just ask Rodman Renshaw's Acumen BioFin group.


Alas no sell side firm can justify assigning finite research resources to the coverage of stocks that are not likely to generate a dime in revenue of any sort for several years to come. CLN has no deal to bring forward - no currency here either.

So that leaves cash. Chances are pretty good that the analyst who has been commissioned to follow CLN is a good analyst. Survival as an independent practitioner implies a plucky individualist - just the sort of personality who is likely to engage in critical and objective analysis. This means the content of the paid-for research is probably no different and maybe even better than if produced at an investment bank or brokerage firm that received compensation through commissions or banking fees.

What is the price of securities research? One way or the other issuers must pick their currency and pay the bill.


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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