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Biotech Stock Mailbag: Dendreon's Aftermath

A classic illustration of this investing rule popped up Wednesday with NuPathe (PATH), developers of a migraine headache patch. On Wednesday morning, NuPathe issued a press release announcing a new common stock purchase agreement in which Aspire Capital Fund had agreed to purchase up to $30 million in NuPathe stock in installments spread over 24 months.

NuPathe, in its press release, said Aspire made an initial investment of $500,000 by acquiring 70,721 shares of NuPathe common stock for $7.07 a share, or a 19% premium to the stock's closing price on Tuesday, Aug. 2.

The impression NuPathe's press release leaves with investors is that Aspire is so confident in the company's future that it was willing to buy stock in the company at above-market price.

Except that's not entirely true, according to NuPathe's materially different disclosure in an accompanying 8-K SEC filing.

NuPathe discloses in its 8-K (but leaves out of the press release) that the company issued 84,866 shares of stock to Aspire in addition to the 70,721 shares purchased. NuPathe calls these 84,866 shares "Commitment Shares." In other words, NuPathe gave Aspire "free" stock valued at $505,000 as an inducement for Aspire to enter into this equity purchase agreement.

The 8-K filing paints a different -- and less rosy -- picture of this equity purchase agreement than what's explained in NuPathe's press release. It's fair to say that Aspire, when the free stock is added to the purchased stock, didn't exactly invest at an above-market price.

In response to questions about the discrepancy between NuPathe's press release and its 8-K filing, CFO Keith Goldan told me that by phone Wednesday that the company could have done a better job with disclosure in its press release. In the company's defense, however, Goldan pointed out that companies routinely pay fees or financial inducements as part of financings or public offerings of stock. With the Aspire deal, Nupathe was able to negotiate a relatively low fee paid in stock rather than cash, said Goldan.

Sure, it's common practice for companies to sweeten the pot for investors in equity or debt financings. Often, a company offers discounted warrants, for example. My counter-point to Goldan, however, was that if NuPathe felt it necessary to trumpet the fact that Aspire purchased stock at an above-market price, the company should have also felt obligated to disclose the inducement it paid Aspire to make the deal happen.
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