IBIO: Time for a Painful Shot of Reality

by Melissa Davis - 2/10/2011 8:40:59 AM

For investors betting on iBio (AMEX: IBIO), a bleeding vaccine developer formerly owned by a penny-stock company with a history of self-dealing, the future could soon deliver a powerful dose of pain.

Originally spawned by Integrated Biopharma (OTC: INBP.OB), an obscure vitamin seller that currently trades for less than 20 cents a share, IBIO has seen its own stock rocket from 55 cents to a high of $6 during its past 12 months as a stand-alone company. To critics who have followed both companies for years, however, IBIO looks a lot less healthy than its current share price.

First and perhaps foremost, they say, IBIO faces a looming secondary offering that will allow holders of low-priced stock – including a tainted brokerage house with a buy rating on the name – to cash in huge gains on millions of cheap shares. By increasing IBIO’s share count by 45%, they note, that offering alone could slash the company’s stock price by almost half. But even without the threat of massive dilution, they say, IBIO looks like a grossly overvalued company that resembles its former parent far more than it does a promising biotech play.

To be sure, corporate filings show, IBIO and INBP share plenty of common traits. For starters, both companies employ CEOs from the same family. Robert B. Kay runs IBIO, while his brother E. Gerald Kay runs INBP and founded the original corporation (Chem International) that launched those intertwined firms. IBIO also counts Gerald Kay and his two daughters, INBP Executive Vice Presidents Christina Kay and Riva Sheppard, among the company’s largest shareholders. In fact, regulatory filings show, those INBP insiders boast larger stakes in IBIO than the company’s own CEO does. 

All told, IBIO’s latest proxy statement shows, INBP insiders presently control more than half of IBIO’s outstanding shares.

Until late 2009, records show, IBIO and INBP also relied on the same auditing firm – cited at least twice for poor oversight – to sign off on their books. Flagged for their weak financial condition, both companies later received official warnings about their abilities to continue operating as going concerns as well.

In some ways, IBIO actually looks less impressive than INBP despite its much higher stock price. (The market values IBIO at $160 million but INBP at just a fraction of that, a mere $3.3 million, instead.) IBIO employs only three full-time workers, compared to INBP’s full-time staff of 117, just for starters. IBIO has no revenue or marketable products, either, while INBP at least manages to rack up some meager sales by peddling vitamins and nutritional supplements. IBIO faces much higher expenses, too, since it costs a whole lot more to develop breakthrough medical products than it does to market vitamins and such.

To be fair, as a biotech company, IBIO operates in a sector crowded with firms that often spend years – and loads of cash – on research and development before they ever generate a cent from actual product sales. But IBIO started down that path seven years ago, when its former parent acquired the patent rights (since weakened) for new vaccine technology, and has yet to complete even the early-stage trials that begin the long and challenging journey toward actual regulatory approval of a drug.

Together with its former parent, records show, IBIO has blown through large sums of cash along the way. In fact,records indicate, IBIO could have easily run out of money without help from two recent private offerings that – combined with earlier sales of low-priced stock – now threaten to materially dilute the value of its shares.

But Noble Financial (also known as Noble International), a sullied brokerage firm that served as the placement agentfor those offerings, has been recommending the stock regardless. In fact, with IBIO already tripling in price since those private stock sales, Noble recently reiterated its buy rating on the company and doubled its price target to $8 a share. 

Noble cited a handful of recent achievements, including the very fundraising activities carried out by its own firm, when issuing its bullish report. It never mentioned another possible motive for its rosy forecast, however: Under a deal inked with IBIO’s two largest shareholders, including the brother of the CEO, Noble received options to purchase millions of cheap shares – with strike prices ranging from just 50 cents to $1.75 a share – that the firm will soon be free to sell.

“We are not aware of any restrictions on sales pursuant to the registration statement,” IBIO’s attorney confirmed on Wednesday, “once it is declared effective.”

'Boiler Room Millionaires'

To some, Noble looks like nothing more than a glorified version of the paid promoters regularly hired to tout dubious penny stocks. To the Financial Industry Regulatory Authority (FINRA), records indicate, Noble looks troubling as well.

Based in Boca Raton, a Florida town known as a hotbed for stock-related fraud, Noble lists Wayne Horne and Nicolaas Pronk as co-owners of the investment firm. According to official records compiled by FINRA, Noble has come under heavy fire – triggering a long list of customer complaints and damage awards – with Horne and Pronk at the helm.

Horne actually spent his early years training at two other brokerage houses, both future targets of securities regulators, before branching out on his own. From August 1988 to October 1990, FINRA records show, Horne worked as a broker at Parker Jameson. During that same timeframe, records show, Parker Jameson allegedly engaged in a stock-manipulation scheme that later prompted regulators to banish its president from the industry.

Before that crackdown, records show, Horne had already moved on to another Florida brokerage house that would become infamous for its alleged “pump-and-dump” schemes. He spent two years at Biltmore Securities, records show, a notoriously shady firm that later served as a possible model for the “Boiler Room” movie and ultimately saw itsleader land in jail.

Meanwhile, records show, Horne arrived at his current brokerage firm in Boca Raton – which he and Pronk now own -- and wound up in some rather shady company as a result.

“Where’s a better place to settle down than Boca Raton, a town known nationally as a bastion of telemarketing scams and white-collar crime, a place so choked with boiler rooms that regulators once dubbed a stretch of Federal Highway the ‘Maggot Mile?’” The Palm Beach Post wrote in a scathing review of the city years ago. “(It’s) one of the few places where a boiler-room millionaire can feel right at home.”

Horne and Pronk assumed full control of Noble in mid-1995, FINRA records indicate, with each partner owning half of the brokerage firm. Since then, Noble and its leaders have triggered one of the longest lists of reportable disclosures – FINRA records of regulatory sanctions, customer disputes, damage awards, etc. – that TheStreetSweeper has ever seen. 

Horne wound up slapped with a brief suspension at one point, records show, due to an alleged scheme involving unsuitable investments in Over-the-Counter stocks. Meanwhile, records show, Noble and its two owners have fielded dozens of other complaints – alleging everything from account churning to stock manipulation to outright fraud – as well.

Despite everything, however, Noble continues to land some plum business deals. When IBIO found itself desperate for cash last year, records indicate, the company turned straight to Noble and its two partners for help. Thanks to contracts forged with IBIO and its top shareholders, records suggest, Noble could soon pocket millions on stock-related gains alone. 

Horne and Pronk failed to respond to phone messages and email requests seeking input for this story.

The Money Maze

Last spring, regulatory filings indicate, Noble inked its first -- and potentially most lucrative – IBIO deal through a complex arrangement involving the company’s largest shareholders.

On May 21, records show, two brand-new Noble affiliates – one led by Hornethe other by Pronk, both just incorporated – scored a sweetheart deal that will allow them to purchase 3 million shares of IBIO stock, currently held by INBP CEO Gerald Kay and INBP Director Carl DeSantis, at prices starting at just 50 cents a share. That entire block of stock options, carrying an average strike price of just $1.13 a share, must be exercised within a nine-month period – with the cheapest ones expiring first -- after IBIO’s recent registration statement (filed on Jan. 27) becomes effective. The two Noble-led affiliates can then sell that stock to other investors at much higher prices.

“The company made a determination that, as a normal part of its growth as a public company, it should develop a more diversified ownership base – preferably including institutional investors – and the movement of shares from its two largest shareholders to the public float would be useful in that regard,” IBIO’s attorney explained on Wednesday. “Therefore, the company has encouraged Messrs. Kay and DeSantis to make some of their holdings available for purchase by others and has involved the option holders, which … are affiliates of Noble International, to facilitate an efficient distribution of the shares to a variety of other investors” through this deal.

For Noble, regulatory filings show, the rewards did not end there. Two months after that first deal, records show, IBIO began paying Noble $15,000 a month in advisory fees and issued the firm warrants to purchase another 500,000 shares of company stock at $1.10 a share to boot. Roughly one-fourth of those options should have already vested at this point, records show, with another 20,000 scheduled to vest with every passing month.

Around the same time that IBIO struck that deal, records indicate, the company rewarded another firm that could publicize its stock and quickly profit from its gains. Specifically, records show, IBIO issued warrants to purchase 300,000 shares of company stock at $1.40 a share to an unnamed “investor/public relations firm” – a polite term often used to describe paid promoters in the penny-stock arena. In that case, records show, the warrants vested immediately and could be cashed in at any time. 

Meanwhile, regulatory filings show, IBIO went on to officially appoint Noble as the placement agent for the recent private offerings that now pose the biggest dilution threat of all. IBIO raised $8 million through those private placements, records show, by selling 4 million shares of stock – coupled with warrants to purchase another 4 million shares – at $2 to $2.20 a share. The company gave Noble $530,000 as a placement fee, records show, and threw in another 250,000 warrants as well. Those warrants can be exercised on a cashless basis, records show, at prices ranging from roughly $2 to $3 a share.

All told, regulatory filings show, IBIO has registered 14.67 million shares – a total equal to almost half its current share count – for possible resale in a secondary offering. When registering that stock for sale, records show, IBIO bluntly warned that the offering could significantly dilute its stock and cause a big hit to its share price.

As its official placement agent, critics say, Noble should have foreseen that secondary offering as imminent and the potential dilution as tremendous. But just a week before IBIO registered that stock for future sale, they note, Noble stepped forward to reiterate its buy rating – and double its price target – on the shares.

To reach its new $8 target, Noble valued IBIO at $225 million – a generous sum for a bleeding biotech company just beginning clinical trials -- and then divided that total by the company’s current (rather than future) share count. If Noble had included the new stock in that equation, already based on a handsome valuation, it would have wound up with a target $1 below the $5.85 price the stock was fetching on that day.

Bad Biotech Bets

By now, records show, Noble has already helped arrange a private placement for at least one other biotech company fueled by investor hopes and dreams.

With the assistance of Noble, records show, Biopure (OTC: BPURQ.PK) raised about $6 million by selling millions of shares of its stock – once a $50 highflier – at prices well below $1 a share. By the time of that late 2005 offering, The Boston Globe later revealed, Biopure had already come under regulatory fire for allegedly misleading investors about the potential approval (never received) for its key medical product. A former Biopure executive wound up pleading guilty to criminal charges in mid-2009, the Globe reported, with the company filing for bankruptcy – and wiping out its shareholders – one month later.

To be fair, other IBIO fans have embraced some notorious losers as well. Last April, records show, IBIO welcomed Cantor Fitzgerald analyst Pamela Bassett – an expert charged with conducting objective reviews of the risky biotech space – to the company’s board. Just weeks before that, records show, Bassett raised some eyebrows when she suddenly adopted a bullish stand on one of the sector’s most controversial names.

The previous year, MarketWatch noted at the time, Sequenom (Nasdaq: SQNM) had taken a massive hit – plummeting from $14.91 to $3.62 in a single day – after revealing that its employees had “mishandled” clinical data on the company’s highly anticipated prenatal test for Down Syndrome. After that, MarketWatch revealed, Bassett quickly slashed her $42 price target on Sequenom’s stock by 90% to just $4 a share. But even then, MarketWatch reported, Bassett stopped short of giving up on Sequenom altogether by placing a lukewarm hold rating on the company’s stock.

Bassett somehow regained her confidence in Sequenom less than a year after that scandal, TheStreet.com noted, slapping a buy rating on the stock again and quadrupling her $4 price target on the shares. Sequenom soared more than 22% to $8.43 that day, TheStreet.com stated, powered by an upgrade based on “fuzzy math” and “ridiculous” financial projections. Going forward, TheStreet.com indicated, Sequenom would likely struggle to hold on to those “momentum-fueled” gains.

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By now, records show, that prediction has already come true. Sequenom set its current 52-week high that day, records show, and now fetches around the same price that it did when Bassett first upgraded the shares.

Meanwhile, just weeks after she made that aggressive stock call, IBIO appointed Bassett to the company’s board. IBIO clearly welcomed the rare arrangement – which would allow an industry analyst to double as a company insider – and rushed to announce the director’s arrival with a mixture of excitement and praise.

“Her analyses and views on biotechnology,” CEO Robert Kay stated at the time, “are valued for their perceptiveness and fresh perspective.”

As illustrated above, however, Bassett’s dicey call on Sequenom failed to pay off for investors. Her upgrade provided only a fleeting boost to Sequenom’s stock, which fell below $5 two months later and still commands less than half of her lofty $16 target – despite a late 2010 surge – to this day.

‘Shady Stock Promoter’

In fairness, TheStreetSweeper found no evidence that Bassett ever issued an actual research report on IBIO itself. Instead, Internet searches indicate, IBIO has relied on bullish coverage from the likes of Noble and others focused on obscure small-cap/microcap stocks.

Earlier this month, for example, Ian Cassel – described as a “shady stock promoter” by one outspoken critic – touted IBIO as a promising stock for “the aggressive investor” looking for outsized gains. Cassel focused heavily on IBIO’s relationships with eye-catching names in the nonprofit world, particularly the Bill & Melinda Gates Foundation, when sharing his bullish views on the company. He noted that Gates had joined forces with a government agency to supply more than $70 million in funding to IBIO’s research partner, the Fraunhofer USA Center for Molecular Biology (FCMB), and indicated that “IBIO owns all the IP (intellectual property) that comes out of the FCMB” deal.

But in reality, records show, IBIO relinquished important rights to that technology more than four full years ago. Under conditions set forth by the Gates Foundation, mandated as part of its financing deal, IBIO lost control of the rights to vaccines developed for the prevention of several common ailments – including influenza and malaria – when used in Africa and other Third World countries (poverty-stricken nations that likely attracted Gates to the program in the first place). 

“To facilitate the grant and continuing support, we agreed to make our platform technology available to various programs to complete development and provide ‘Global Access’ to vaccines against influenza, rabies virus, malaria and tyrpanosomiasis (African sleeping sickness),” IBIO states in its official corporate filings, “provided that if the Gates Foundation and FhCMB do not pursue such programs to completion, the subject rights revert to us.”

Meanwhile, Timothy Sykes – a well-known short seller in the penny-stock arena – blasted Cassel for his rosy coverage of Quepasa (AMEX: QPSA), a company touted alongside IBIO in his recent column. Sykes referred to that report as Cassel’s “97th blog post on QPSA,” which he personally described as a “carcass company” trading at 700 times its annual sales. QPSA’s stock, which hit an all-time high of $15.45 less than a week before that report, has since reversed course – falling more than 20% from its recent peak – and now trades for $12 a share.

Sykes took heavy aim at Cassel for his past coverage of several other stocks as well: Premier Exhibitions (Nasdaq:PRXI), a stock that fetched $15 a few years ago but now trades for around $1.50 a share; Tix Corporation (OTC:TIXC.PK), a roller-coaster stock that hit the market at $5 in the spring of 2008, plummeted to $1 by early 2009, bounced back toward $4 in the fall of that year and currently trades – on very thin volume – for roughly $1.50 as well; and Electronic Game Card (OTC: EGMIQ.PK), a penny-stock company that even Cassel himself has admitted wound up engaging in “outright fraud.”

Before that, Sykes had already attacked Cassel for his coverage of yet another company. He claimed that Cassel had touted GelTech Solutions (OTC: GLTC.OB) without disclosing that he had received a 30% discount when purchasing the company’s shares.

“While the blatant lie I caught him in is a small one,” Sykes wrote at the time, “once you can establish a pattern of behavior, well, it throws everything else Ian Cassel says into question.”

Truth and Consequences

Based on IBIO’s own regulatory filings, Cassel clearly overstated the rights afforded to the company for Gates-financed development of vaccines. For its part, records indicate, IBIO has chosen to address this issue by focusing its efforts on unrestricted opportunities instead. 

IBIO still enjoys liberal rights to Gates-funded development of new vaccines for the avian flu, records suggest, which the company is now free to begin testing in clinical trials. With IBIO just securing regulatory clearance for Phase I trials – the first phase in a lengthy three-phase process – last September, however, the company still faces a long and expensive road ahead.

Without major help, records indicate, IBIO cannot afford that journey. Even after raising millions through its recent private placements, records show, IBIO could tap the capital markets once again as early as next year.

“We will need substantial additional funding to execute our business plan,” IBIO noted last month, when registering its new stock for sale. “Until we can generate a sufficient amount of license and/or product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financing (and potential corporate/licensing deals) … If we are unsuccessful in raising additional capital or other alternative financing, we might have to defer or abandon our efforts to commercialize the intellectual property and cease operations.”

Like any startup biotech company, of course, IBIO could eventually hit a big homerun. But in the meantime, those filings suggest, IBIO shareholders face the likely prospect of massive ongoing dilution even if that victory comes. Meanwhile, those filings indicate, Noble and other holders of low-priced stock stand to win – with current built-in gains of up to roughly 1,000% -- whether the company ever gets past first base or not. 

* Important Disclosure: Prior to the publication of this article, TheStreetSweeper (through its members) established a short position in IBIO with the intention of profiting on future declines in the stock price. Specifically, TheStreetSweeper sold a total of 89,715 shares of IBIO short at an average price of $5.31 a share. It covered 69,933 of those shares on Feb. 10 at $4.36 a share and the remaining 9,082 shares on Feb. 11 at $4.20 a share. Following those transactions, TheStreetSweeper no longer has a position in the stock. 

As a matter of policy, Melissa Davis – the editor of this website and the author of this story – will never take a financial position (short or long) in any of the stocks that she covers. To contact Ms. Davis, please send an email to editor@thestreetsweeper.org.