PRIME
SERIES
“We also never
factor in, nor do we often find, synergies.”
Warren Buffet
2018 Annual Letter
to Shareholders
Note on Mergers
and Acquisitions
MYnd Analytics
(MYND: Nasdaq), a provider of telepsychiatry
services and clinical decision support tool for mental health practitioners, is
merging with Emmaus Life Sciences, a privately-held developer of treatments for
sickle cell disease and other rare diseases.
That may seem like an odd paring.
Indeed, the two operations will spend no time together at all. As Emmaus walks into the corporate house
through one door, MYnd’s mental health services and technology will be taking
flight through a window.
It is an unusual deal that takes
some study to appreciate, but the homework could be worthwhile for investors.
MYnd
Analytics - right time, right place with mental health
care
Mental
health has received new attention in recent years, possibly as a consequence of
an increase in horrific mass shootings linked to mental health issues or
perhaps as a phenomenon of social media.
Unfortunately, as the stigma of mental illness has fallen away and more people
have sought out treatment, patients are confronted with the disappointment of
inadequate mental health care services.
There are not enough professionals in the right locations to meet demand. The Journal of American Medical Association reported in 2015, that one in five people has some sort of mental health condition. Yet new psychiatry residents grew by only 5.3% in the years 2010 to 2015.
Telepsychiatry
is one solution that is proving effective in getting mental health care to
people who need it. Patients are served
at a distance usually through video conferencing or some other kind of live
interactive communication system. Just
like in a face to face encounter mental health care providers can conduct
psychiatric evaluations, provide individual and group therapy, give patient
education, and manage medication.
MYnd
provides telepsychiatry services through a network of licensed mental health
practitioners that are dedicated to distance mental health care. The company
maintains a secure portal for these professionals and their patients that are
served through contracts with interested parties such as insurers, local
clinics, corrections facilities and employers.
MYnd currently has thirty-two contracts in place across the continental
U.S.
MYnd is
set apart competitively by its clinical decision support tool that can assist
mental health care professionals in selecting medications. MYnd’s PEER
Report relies on an individual patient’s electroencephalogram (EEG) that
records brain wave patterns. Data from
this non-invasive exam is analyzed against the company’s proprietary database
of over 11,000 known patient outcomes that help predict the efficacy of non-psychotic
psychotropic medications for a patient based on his/her particular brain wave
pattern.
Historically,
prescribing psychiatrists have relied on trial and error to find the most
effective medication for their patients.
While the prescribing physician still makes the final selection in
medications, the PEER Report helps
remove much of the guess work in treating patients who may need drug therapy. The PEER
Report is used within MYnd’s telepsychiatry network and has begun to gain
traction in the broader market as insurers and other interested parties seek
ways to reduce the time and cost to achieve successful medication outcomes.
Importantly,
MYnd has accumulated a portfolio of twenty patents covering the company’s clinical
decision support tool, including seven in the U.S. The patents protect the company’s proprietary
quantitative electrophysiology and the process of using the company’s database
of EEGs.
Emmaus
Life Sciences - first to market with treatment for sickle
cell disease
The
other side of this captivating deal is Emmaus Life Sciences and its team of scientists dedicated to finding
therapies for rare and orphan diseases.
The company’s first product is an L-glutamine oral powder marketed as Endari to treat the complications of
sickle cell disease in adults and children. Emmaus realized its first sales of Endari in January 2018, and has been
building a distribution network of pharmacies and medical distributors in the
U.S.
Sickle cell disease is a hereditary red blood cell disorder that can only be cured by risky bone marrow or stem cell transplants. The disease affects millions worldwide most of whom are of African descent. Data from the World Health Organization suggests that in sub-Saharan Africa up to 2% of all children are born with this debilitating and often painful condition. According to the Centers for Disease Control and Prevention, there are as many as 100,000 Americans with the disease.
Emmaus’
Endari has been well received in the
market because there are very few effective treatments for sickle cell. When a child is diagnosed, they are
prescribed antibiotic penicillin and vitamins.
Eventually, a patient might be given pain-relieving medication,
antidepressants or antimetabolites that are aimed at reducing and preventing
complications. According to Grand View
Research, the chronic condition of sickle cell leads to a large and steadily
growing market value that is expected to reach $5.5 billion by 2023.
In late
2018, Grand View’s industry analysts counted at least thirty-seven different
drugs aimed at sickle cell disease in various stages of development. Despite what appears to be a crowded space,
Emmaus is expected to dominate the market for some years to come. Its competitive position is supported by its Endari L-glutamine therapy that is
already approved in the U.S. Federal Drug Administration (FDA) and is expected
to receive approval by the European Medicines Agency (EMA) before the end of
2019.
What
will shareholders get in the deal?
The
deal will give MYnd shareholders a taste of the Emmaus opportunity without
paying a penny in cash. Here is how it
will work.
Emmaus
shareholders will receive shares of common stock in MYnd Analytics. The number of shares MYnd will issue to
Emmaus shareholders is not yet determined because Emmaus is still adjusting its
capitalization picture. There is the
potential for some Emmaus debt to be converted to common stock before the
merger takes place. Nonetheless, when
all adjustments are completed by each company, the accountants will plug an exchange
ratio into their calculators such that Emmaus shareholders as a group will hold
94.1% and MYnd shareholders will own 5.9% of the merged company.
As the
Emmaus folks come on board through the merger, MYnd Analytics will be renamed
Emmaus Life Sciences. It will remain a
public company and will begin to trade under a new symbol EMMA. At the same time the MYnd operations with all
of its telepsychiatry services and PEER
clinical decision support technology will be bundled up along with a kitty of
cash for a ‘spin out’ to a newly registered public company with a new name - Telemynd.
MYnd
shareholders will receive one share of the new ‘spin out’ company for each
share currently held in the old. As of
February 2019, MYnd had 8.4 million common stock shares outstanding. The share
count includes new shares recently issued to Aspire Capital pursuant to an
equity purchase agreement that allowed MYnd to raise $1.1 million in new
capital to support its operations.
Thus
MYnd shareholders will end up with shares in two public companies - 5.9%
of the old company that will house Emmaus Life Sciences and 100% of a new
company that will be home to the MYnd telepsychiatry services and the PEER clinical decision support tool. All of MYnd’s management team will move to the
spin out, but MYnd’s chairperson will keep a seat on the new Emmaus board of
directors in order to watch over shareholder interests.
Emmaus
shareholders will also have cause to celebrate.
Holders of Emmaus common stock will get new liquidity by turning in
‘hard to sell’ shares in a private company for exchange listed shares in a
seasoned public company.
Lots
of shares, but what of value?
At the
end of the day a company is worth no more or less than the current value of the
cash flows expected in the years ahead.
Unfortunately, pinpointing value for this deal is tricky since neither
MYnd nor Emmaus have achieved profitability.
That said, both companies have carved out highly defensible competitive
positions with unique, protected technologies.
Such positions of power could translate into strong sales and earnings
in the years ahead.
In the
fiscal year ending September 2018, MYnd generated $1.1 million in revenue
through its telepsychiatry services and $263,700 from its PEER neurometric
services. The company realizes a gross profit
on both segments, but operating expenses exceed those profits. The reported operating loss in 2018, totaled
$10.2 million. Given that there are
significant non-cash expenses such as stock-based compensation, investors are
wise to also consider cash earnings. Cash
usage by operations totaled $9.0 million in fiscal year 2018. Results in the fiscal first quarter of the
current fiscal year, suggest the company is still building revenue but
struggling to find profits under a hefty operating budget.
In
first nine months of 2018, Emmaus generated $8.2 million in total revenue, most
of which resulted from sales of the Endari
therapy for sickle cell disease. The
company turned a tidy 94% gross profit on these sales. Unfortunately, these profits were eaten up by
a heavy budget for marketing and selling Endari
in its first year on the market. Emmaus’
operating loss in the nine-month period was $9.3 million.
Accounting
for Emmaus’ debt and equity financings injects quite a bit of noise into the
company’s reported net income. Thus, to
gauge financial performance investors are better informed by operating cash
flows. Emmaus used $4.7 million in cash
to support operations in the first nine months of 2018.
Emmaus
had $16.7 million in cash on its balance sheet at the end of September
2018. While that nest egg will support
operations for at least a year or two at the recent spending rate, the company
indicated in the public filing for the merger that it will be necessary to
raise additional capital to fully execute the company’s strategic plans. Those
plans include funding development of a therapy for corneal diseases using
‘cultured autologous oral mucosal epithelial cell sheets,’ which could be
Emmaus’ second major therapeutic candidate.
Thus Emmaus shareholders and their new confederates at MYnd can expect
some equity dilution or interest costs through future capital raising efforts
even as revenue and earnings rise from sales of Endari sickle cell therapy.
Loose
Ends
The
merger partners have their work cut out for them. Emmaus is still negotiating with some of its
lenders over conversion of debt to common stock. The MYnd team is working with accountants and
tax attorneys on the thorny issue of net operating losses carried forward on
its balance sheet as tax related assets.
At the end of September 2018, MYnd had $60.2 million and $33.8 million
in state net operating loss carryforwards that could be of value to either
company if those NOLs can be salvaged in the change of ownership.
The
spin out of MYnd operations concurrent with the merger may be considered a
taxable dividend distribution for MYnd shareholders. The value of the dividend - determined by fair market value of the MYnd
spinout - has not been finalized. U.S. holders of MYND
shares will need to watch for updates on the fair value topic to figure out
whether they will have a tax bill. The
ongoing analysis of the net operating loss carryforwards may help offset
shareholder capital gains taxes as well as MYnd’s corporate tax liability.
MYnd is
also asking shareholders to approve a reverse split of its shares to make
certain shares in the new company meet Nasdaq listing requirements. The precise ratio would be determined by the
board of directors. Emmaus and MYnd
shareholders alike could get a surprise by the mathematics of a reverse split that
instantly increases stock price and reduces shares outstanding.
A
Deal That Cannot Be Refused
The
Emmaus management team had been searching for way to gain access to the public
markets where liquidity leads to cheaper capital. After months of networking, the company
approached MYnd leadership with a merger proposal. MYnd would have vacate its ‘public corporate
house’ to make room for Emmaus, but a share of Emmaus bright future with Endari could be a lucrative reward for
the disruption.
The
final decision will be made by MYnd and Emmaus shareholders. When leadership of the two companies sets a
date, a majority of each company’s shareholders must vote in favor of the
transaction. Members of senior
management and the board of directors who own shares have all pledged to votes
their shares in favor of the deal. Since
both companies have significant insider ownership - 16.4%
of MYnd common stock is currently in the hands of management and directors and about 29.5% for
Emmaus -
offer that cannot be refused may be well on the way to acceptance.
Neither the author of the Small Cap Strategist
web log, Crystal Equity Research nor its affiliates have a beneficial interest
in the companies mentioned herein.
SELECTED
PEER COMPANIES
|
||||||
Company
|
SYM
|
Price
|
Mkt Cap
|
Sales
|
EPS
|
PE
|
Global Blood
Therapeutics
|
GBT
|
$56.55
|
$3.2B
|
-0-
|
($3.40)
|
Neg
|
bluebird bio,
Inc.
|
BLUE
|
$143.00
|
$7.9B
|
$54.6M
|
($10.68)
|
Neg
|
Pfizer, Inc.
|
PFE
|
$39.97
|
$221.9B
|
$53.7B
|
$1.87
|
21.42
|
Novartis, Inc.
|
NVS
|
$81.29
|
$190.2B
|
$53.5B
|
$5.38
|
15.11
|
CRISPR
Therapeutics, AG
|
CRSP
|
$41.02
|
$2.2B
|
$3.1M
|
($3.44)
|
Neg
|
Vertex
Pharmaceutical
|
VRTX
|
$172.85
|
$44.2B
|
$3.1B
|
$8.09
|
21.37
|
Avedro, Inc.
|
AVDR
|
$12.65
|
$212.9M
|
$27.7M
|
($17.97)
|
Neg
|
Teladoc Health,
Inc.
|
TDOC
|
$57.75
|
$4.1B
|
$417.9M
|
($1.47)
|
Neg
|
MYnd Analytics,
Inc.
|
MYND
|
$1.28
|
$10.8M
|
$1.6M
|
($1.55)
|
Neg
|
*All figures in
USD; Market cap and sales in billions or millions as indicated
|
||||||
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