Neil Woodford-backed Circassia Pharmaceuticals (LSE: CIR) raised £191m at 310p a share and had a market capitalisation of £600m when it listed on the stock market in 2014. It was lossmaking but had high hopes for a range of allergy treatments it was developing.
In 2015, it raised a further £263m to fund two acquisitions. One gave it infrastructure in key markets for the commercial launch of its allergy treatments (“once approved”) and the other gave it a pipeline of complementary products in the respiratory diseases space.
Unfortunately, its flagship cat allergy treatment failed a Phase III study in 2016. And after its house dust mite treatment also failed, it abandoned its entire allergy programme. It was left with its respiratory products and a deal for certain commercial rights to two AstraZeneca products. The shares are now trading below 100p and its market cap is about half that of its flotation.
Testing patience
Circassia was at one time a top 10 holding in Woodford’s Patient Capital Trust but he shifted it into his Equity Income fund last August at a time when he was increasing Patient Capital’s exposure to riskier unquoted stocks. Not that Circassia isn’t risky. It’s never made a profit and analysts are expecting an £86m pre-tax loss on revenue of £47m when it posts its results for 2017. And losses are forecast to continue for the foreseeable future.
Due to the uninspiring history and lossmaking outlook, I view Circassia as a stock to avoid at this stage. I also note that a hedge fund (Mangrove Partners) has increased its position significantly over the last 12 months, from below 2% to 5.42%. I’m not privy to Mangrove’s thesis on Circassia but it tells us: “We focus on companies that are executing a flawed business plan or strategy, engaging in fraud, or capitalizing on a fad.”
Frankenstein creation
Another Woodford-backed company on my list of stocks to avoid is BCA Marketplace (LSE: BCA). Not all companies grow from small acorns. Some £1bn businesses are constructed within the blink of an eye. Team an entrepreneurial executive with a corporate finance house, and heavyweight backing from City fund managers and banks, and a new industry giant can be conjured by buying up a clutch of existing businesses.
BCA is one such company. An AIM cash shell in 2014, it’s now a £1.4bn FTSE 250-listed group. It’s a major player in the secondhand vehicle industry, with businesses across the market. I’m not keen on Frankenstein creations of this type. They’re often launched in a ‘hot’ sector and if the sector is cyclical, there’s every risk of overpaying for assets at the top of the cycle. I fear this could be the case with BCA.
The group reported rising revenue and profit in its half-year results in November but as my Foolish friend Roland Head noted, the car market looks like it could be heading for a downturn. BCA’s net debt of £287m may not seem too onerous but I see considerable risk behind the face of the balance sheet (and off it) in the event of a downturn. A forecast P/E of over 16 at a share price of 167p offers an insufficient margin of safety for the risk, in my view. I also note that four hedge funds have disclosed short positions in the stock, totalling 2.35%.