Event - Evolva lockup expiry will unleash volatility

Analysis

Evolva's SFr272m ($277m) market value will be put to the ultimate test next week - 85% of the company's stock that is subject to a lock-up will be free to trade on December 14, an event that is expected to prompt a big drop in the Swiss biotech's share price.

While it is possible that all the original venture capital backers subject to the lockup could choose to hold on to their stakes, the betting among industry observers is that there will be a sell-off. The good news is that the lapse of the lock up will allow Evolva to pursue a more normal public life, hopefully with a more easily tradeable stock, while a more accurate market value will be established as a large proportion of the company’s equity leaves the hands of 12 funds.

A billion-dollar moment

The company, which engineers small molecule drugs and other products by genetically altering yeast, went public a year ago by reversing into Arpida and taking its listing on the Swiss stock exchange. It briefly flirted with a billion-dollar valuation during a period of heavy trading early this year that suggested every free-float share changed hands, a pattern that raised eyebrows (Evolva share surge prompts head scratching, January 11, 2010).

The remainder of the year has seen more steady, if perhaps artificially high, prices as the company has proceeded with tests on its lead product, EV-077, an antithrombotic in ascending dose human safety trials, and preclinical candidates.

The current share price, SFr1.98, is reckoned to be much higher than can be explained by the company's early stage portfolio. Analysts from Edison Investment put the market capitalisation at SFr182m, which suggests a price closer to SFr1.30.

“The company is very early on in clinical development. The data do not justify this kind of valuation,” says Andrew Weiss, an analyst with Vontobel.

Taking profits

The belief among analysts is that with the expiry of the one-year lockup the original venture investors, which include such names as Sunstone Capital and Wellington Partners, will want to cash in on their investment.

In theory, these funds could chose to sell small tranches slowly to try and limit the impact from any sell off, but few seem to believe this will happen.

“It’s the prisoner’s dilemma,” Mr Weiss said. “What is the other one going to do while I’m not watching.”

Even if the price were to fall to SFr1 from the current SFr 1.98, “they’re still sitting on huge profits,” he says.

Evolva declined to comment on the lockup's expiry.

With such a firm date on the calendar, the company is no doubt bracing itself for volatility next week. But with more shares available for trade and the issue of the lock-up behind it, Evolva will be able to spend more time telling investors about its pipeline and less time explaining the technical aspects of its valuation.

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