Saturday, 10 September 2016

LPTN: A Better Merger Agreement Than STEM

After another successful trade on PTLA, it's time to move back to the small cap world. There has been a recent trend of microcaps listed on the NASDAQ with businesses in limbo gaining new life as they merge with a company with larger operations that is looking for a stock listing. The most active of these over the past couple of months has been StemCells Inc. (STEM) which on August 16 rose an incredible 600% from $0.37 to $2.60 after it announced a merger with Microbot Medical, a early-stage robotics company in the medical field. While it has lost about 50% from its high, STEM is still trading at a $16 million market cap. Current STEM shareholders will retain 5% of the company with the other 95% going to Microbot investors. That means at its current price, the market is valuing the total company at $320 million ($16M/5%).

Lpath, Inc. (LPTN) announced on Thursday afternoon that it entered into a merger agreement with Apollo Endosurgery, Inc. LPTN will retain 4.2% of the company but unlike STEM's deal, Apollo actually has substantial revenues. Apollo had $68 million in revenue in 2015 from its medical devices that can be used to treat obesity. The company's leading product is the Lap-Band, which it purchased from Allergan for $110 million in 2013. The Lap-Band is a rather popular weight loss device, designed to limit the stomach's ability to expand and make the device wearer feel full faster. The device is very popular; out of 117 reviews on, 75% of the people said it was "worth it". So unlike Microbot, Apollo has at least one proven product selling in the market.

LPTN closed at $2.58 on Friday for a $6.13 million market cap. The current market valuation of the total merged company is $146 million ($6.13M/4.2%), which is ridiculously low when compared to STEM's deal. This leads to a price-to-sales ratio of only 2.1 for a company in the medical device industry - a device that works rather well if you read patient feedback online. Consider also that the company paid $110 million for the Lap-Band and that Apollo investors are going to chip in with another $29 million as part of the merger agreement. Those two items alone bring the value of the company almost up to the proposed market cap after merger. Apollo also has $11.6 million in cash and $50 million in long term debt.

LPTN started Friday strong, up 25%. But just like everything else in the market, it crashed by the end of the day to close at $2.58. We believe that was a result of a "sell everything" Friday afternoon which was magnified by the fact that LPTN is a thin-float microcap that had volatile trading on great news. That means LPTN attracted a lot of day traders on Friday which may have resulted in a disproportionate amount of end of day dumping by traders who don't know a lot about the fundamental value this company holds.

There will be an investor conference call on Monday at 4:30pm to discuss the details of this deal. We believe that could be the driver to push it up. We recommend to readers to get it on the stock early on Monday to ride the wave. With the extremely small float, fundamental value of this deal and potential hype that may occur thanks to STEM rising 600% in one day on very similar, but inferior merger news, LPTN is one of these types of stocks that could run a ridiculous amount in one day.

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