Not Betting the Farm on Acusphere
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By TMFBigFrog
July 6, 2007

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Can anyone provide a reason why a new investor wouldn't wait until at least the NDA is filed, if not wait into Q1 '08 before putting cash into this opportunity?

The market is faster than we are. News is generally priced so quickly into a company's stock that we mere mortal individual investors will rarely (if ever) be able to achieve excess profits from investing in line with the headlines. As a result, an investor's primary options are:

#1) Anticipate the likely headlines and invest before they break.
#2) Determine where the market overreacted one way or the other in response to a headline, and invest to take advantage of that overreaction.
#3) Ignore the news all together and either index or invest based on pure fundamental and business analysis.

Clearly Acusphere does not qualify as a decent investment under #3 at the present time. The company is hemorrhaging cash, is trading above what its book value would be if it just threw in the towel and gave up, and has essentially no real revenue.

That would mean that the argument for investing is largely based on #1 and #2.

Let's address #2 first. Short term, the expensive financing, executive defections, and failure of Imagify to be a "brainless slam-dunk" approvable compound by the FDA have been a trifecta of bad news. No sane CFO would have voluntarily left this close to the Big Pay Day of Imagify's approval. Which likely means one of two things is true:
a) The ex-CFO was pushed out the door for something like either poor cash management or poor management of the company's most recent round of financing. The code phrase "pursue other interests" in the press release is often, but not always, code for "we don't want you around any more, please leave."
b) The ex-CFO had enough information from being plugged into the company and its approval efforts to believe that Imagify would not be approved and wanted to be the first rat to flee the sinking ship.

I don't have enough data to know which (if either) of the two scenarios is true. Given Acusphere's stock market performance since the CFO resignation announcement, you could conceivably make a case that the market is starting to anticipate "b". Which means that if "a" is the truth, the news isn't as bad as the market projected. That would give investors who bought subsequent to the resignation news the potential opportunity to profit from a relief rally.

Of course, that relief rally is really only does anyone any good if there's a positive headline (#1 from the list above) out there waiting to be written. The headline that says "Imagify Approved." From what I've seen, it has the potential to be a blockbuster compound, if it's approved for use in the U.S. The wild card, aside from any testing results that may come up surprisingly bad, is the FDA -- which has been hyper-cautious about approving new treatments in a post Vioxx world.

Unlike a Pfizer or a Merck, which have strong revenues from existing products and can survive something like the loss of Vioxx or the failure of a clinical trial, Acusphere has almost no revenue to fall back on, should Imagify bite the dust. About the only rational reasons I can see to own shares in the company is a belief that either:
I) Imagify will be approved, or
II) The company's intellectual capital is worth at least the premium over its book value less anticipated burn that the market is valuing it at today if Imagify is not approved.

Frankly, as an investor in Acusphere, I'm very much hoping for Imagify to be approved -- but I certainly can't predict the FDA. If it is approved, then that's wonderful. If it's not approved, I very much doubt the market would react favorably, and I wouldn't count on anything near the current price in a salvage sale. While I am an Acusphere shareholder, it's really only a small fraction of our overall portfolio -- somewhere in the magnitude of 0.5%-1%. I'm willing to take a calculated speculation -- especially when there's at least some positive data to back it up -- but I'm not willing bet the farm on one.

And that, my friend, is exactly what an investment in Acusphere is right now -- a calculated speculation that there will be a headline that reads "Imagify Approved." If that headline gets written, the market will very likely react to it far more quickly than you can. Of course, if that headline never does get written, or if the opposite headline is written, it could go all the way to $0. Such is the nature of investing in small companies with little more than research to their names.

Best regards,

Disclosure: At the time I wrote this, I owned shares of Acusphere and Merck.

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