One of the things I really dislike about the dynamic of the ASX is the false attribution of “quality” to the existence of any kind of analyst coverage. At least when one of the usual personalities like Smith, Sinatra, Stanton or Storey (I fondly think of them as the “S”-men) posts coverage you know, transparently, they are sell-side analysts producing material to market equities on behalf of their brokerages. I don’t always agree with the content, but the materials are professional and the disclosure of commercial interest is more than adequate. I also genuinely believe these guys try to put some back-up into their marketing claims. Certainly, if you read their materials often enough you can find some of the warning signs alongside the puff.
But what I don’t really like is the growth in the use of “analyst for hire” firms like Edison and when I read the recent turd published on Regeneus (ASX : RGS) I felt compelled to comment. I talk to a lot of ASX biotech/pharma CEOs and they feel very pressured to use these firms as a way of pandering to the information demands of retail shareholders. One CEO recently commented that they had received criticism from some of their more rabid shareholders for not having firms like Edison and Van Leeuwenhoeck Research listed on their website for coverage, perhaps not fully appreciating the expense and perceptual issues with institutional investors in doing so.
Going back to Edison’s coverage of RGS, all I can say is what a crock. I’m not going to pick on the individual analysts for being clueless and financially illiterate, rather I take the position that such a report gets “sign-off” at an organisational level and that, in my view, means the responsibility for quality is a corporate responsibility. In reading this report, I couldn’t find one quantitative or analytical premise that withstands any kind of critical review. The revenue model is bollocks, the valuation target completely unjustified not only in absolute terms, but in consideration of the material changes in RGS business prospects in the past 6 months.
As for the headline of “two new deals” this year, obviously no investor guidance in the form of analyst report could be discordant with prior management disclosures. But are we supposed to honestly believe that signing a distribution or marketing partnership agreement represents a commercial inflection sufficient to support a $100m+ prospective valuation? It’s all particularly offensive if you think how marginally capitalised this company is and the fact that any kind of ongoing product development is utterly dependent on an under-performing management team raising onward financing for a fairly baseless product pipeline (so probabilities are therefore wildly optimistic and valuation scenarios are not effectively moderated by the conditional probability of future financing events). Anyone that has ever done a biotech deal would also look at the envisaged economic interest scenarios with ridicule.
But the very worst thing about this “research” is that it obviously assumes that RGS shareholders are just fundamentally morons. It’s bad enough that this is nothing better than a paid advert thinly disguised as a market and financial analysis, but the actual content itself is just mere puff. If I were the RGS management team and I had commissioned this piece of detritus, I would want my money back.
If I were a shareholder (which I am not) I would be aghast.
For all you small cap ASX bioscience CEOs out there thinking about this as a shareholder engagement strategy, please exercise caution. By all means invest in “research” as an investor relations tool if you are swimming in so much cash you can justify it, but if you do, own the process and don’t be complicit in serving up manure like this. Your shareholders are people, not fungi.
Credit for the feature image: I have “borrowed” some of the graphic content from “Madigan’s Mushrooms“.