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.
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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%.
