Things Are Not Well at Nanosphere (NSPH)
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In September of 2013, we highlighted Nanosphere (NASDAQ:NSPH) and their promises of high margins for a technology which uses gold nanoparticles to develop clinical diagnostic tests that are two to three times as sensitive as those commonly used in hospital today. Based on the discoveries of Chad Mirkin, Nanosphere’s benchtop Verigene System allows for simple, low cost, and highly sensitive genomic and protein testing on a single platform with the ability to run multiple tests simultaneously on the same sample. As of June 2013, they had FDA clearance for 7 assays.
Nanosphere’s technology was brought to market with a less than spectacular IPO that as of our last article, had lost investors about -90% so far. At that time, Nanosphere stock was trading at $1.92 giving the company a market cap of around $110 million. Today, the shares have sucked to just 24 cents giving the company a market cap of less than $30 million. Long term investors who are left holding penny shares have to be asking themselves, “just what happened”? Revenues have been growing strongly with $9.6 million taken in for the nine-month period ended September 30, 2014, as compared to $6.6 million for the nine-month period ended September 30, 2013. There were 30 new customer placements during the third quarter of 2014. While losses are steep with $28 million burnt through in the first 9 months of 2014, the Company claims to be able to reach positive cash flow when annual revenues reach around $75 million.
Nanosphere is a company that investors have been patiently waiting on for a long time now. The Company has burned through $412.5 million since inception. The share price has now fallen below $1.00 per share which is the required price limit for continued listing on The NASDAQ Global Market. Nanosphere has been given until March 18, 2015, to regain compliance with this requirement. Just last week, a rather ominous 8-K filing indicates some severe inner turmoil in the company.
On January 26, 2015, Sheli Z. Rosenberg, the Company’s chair of the board of directors, resigned as a director of the Company. The Company’s board of directors intends to conduct a search for a successor chairman of the board.
This does not appear to be a planned event and could be excused as perhaps owing to personal reasons were it not for an additional piece of information.
Also on January 26, 2015, Roger Moody notified the Company that he would be stepping down as the Company’s chief financial officer and will resign from all positions with the Company effective on February 11, 2015.
While the resignation of multiple C-level appointments at the same time is suspicious in itself, an even more ominous piece of information was disclosed as well.
On January 22, 2014, the Company received a warning letter (the “Warning Letter”) from the U.S. Food and Drug Administration resulting from inspections of the Company’s facility in Northbrook, Illinois by the FDA’s Chicago District Office that occurred in March 2014. The Warning Letter relates to deficiencies in the Company’s quality system regulation.
In the health care industry where quality is paramount, just how does this appear to current and prospective buyers of the Verigene System? Nanosphere goes on to state:
The Company takes this matter seriously and is in the process of evaluating the corrective actions required to address the matters raised in the Warning Letter. The Warning Letter does not restrict the manufacture, production or shipment of any of the Company’s products, nor require the withdrawal of any product from the marketplace. However, failure to promptly address the issues raised in the Warning Letter to the FDA’s satisfaction or to comply with U.S. medical device.
With the share price gradually plummeting -89% over the past 12 months, it would appear that this bad news had been priced in now for quite a while which implies that investors who were “in the know” bailed out while they could.
A planned top-level shake up is not necessarily a bad thing for investors, but one that results from the “top blowing off” is. While investors may look to bargain hunt at these price levels, it may be prudent to stay on the sidelines instead until a concrete resolution to the FDA Warning Letter is made clear and a new Chairman of the Board is announced for Nanosphere (NASDAQ:NSPH).