Redeye leaves a comment following Lipum’s announcement of the preliminary outcome of the rights issue. The preliminary breakdown suggests that 57.8% of the shares in the rights issue were subscribed to, corresponding to a capital raise of approximately SEK15.3m.

Yesterday, Lipum announced the preliminary outcome of the new share issue with preferential rights for the company’s shareholders, for which the subscription period ended yesterday, 18 July 2023. The rights issue entailed a maximum of 2,870,334 shares and was covered by subscription undertakings from major shareholders covering approximately 53.1% of the rights issue. However, the preliminary breakdown suggests that only 1,660,461 shares, approximately 57.8% of the shares in the rights issue, were subscribed to. This corresponds to a capital rise of approximately SEK15.3m.

While we argue that securing the subscription undertakings without imposing significantly discounted subscription prices further demonstrated the company’s strong ownership base, we believe this was not the outcome the company had in mind. Lipum set the subscription price at a relatively optimistic SEK9.2 per share, which at the time represented an 8% discount to the previous day’s closing price.

In our <a href="https://www.redeye.se/research/915279/lipum-resolves-on-a-rights-issue-of-sek26-4m">note following the rights issue announcement</a>, we stated that the company took a risk by setting the subscription price so close to the share price level of that time. There was always a risk that the rights issue could trade “out-of-the-money,” leaving no demand for the unsecured portion of the rights issue. Unfortunately, this became close to reality as only 4.7% of the remaining part of the rights issue was subscribed to.

Consequently, we believe Lipum will have to perform a capital raise again at some time over the upcoming nine months. On the bright side, in contrast to the heavily rebated rights issues performed by many peers in the Scandinavian biotech sphere, the rights issue has had no negative impact on share price development. Accordingly, we argue that Lipum is in a better position to manage its cash balance now than before the rights issue, as the company has also raised some much-needed SEK15.3m.

Following the rights issue, we estimate Lipum to have a financial runway over Q1 2024. We will provide further analysis of the rights issue, along with updated estimates and valuation in conjunction with the company’s upcoming Q2 report.

Lipum

* Pre-revenue stage with no proven business model, generating negative cash flow and no profits.
* High dependency on a single product (SOL-116) for future revenue, limiting diversification.
* Vulnerable to regulatory changes and interference in the highly regulated pharmaceutical industry.
* Reliance on key personnel for success, typical of smaller biotech companies.
* Significant risk of business failure if upcoming clinical trials are unsuccessful, highlighting the binary nature of drug development.

* Strong growth potential in the expanding RA market, driven by aging populations and increasing chronic disease prevalence.
* Asset-light business model with potential for efficient scaling once the product is approved.
* Robust intellectual property protection and promising clinical data provide competitive advantages.
* Committed to environmental sustainability and ethical practices, with a focus on improving patient health.
* High employee satisfaction and low turnover indicate a positive work environment.

* Lipum lacks profitability, with no positive indicators for gross profit margin, operating margin, return on equity, or return on assets.
* The company shows no consistent revenue or earnings growth, falling short in all historical growth metrics.
* Financial health is concerning, with insufficient cash to cover expected burn rate and likely need for capital raising within 12 months.
* Earnings quality appears weak, failing to meet benchmarks for inventory management, accounts receivable, and cash flow conversion.
* Lipum does not pay dividends, indicating it may be in an early growth stage or struggling financially.

* Current assets are 1.5 times greater than current liabilities, indicating strong short-term liquidity and ability to cover immediate financial obligations.

* Relatively short tenure of the current management team, potentially limiting institutional knowledge and proven track record within Lipum.
* History of changing strategies and postponing clinical trials, which may raise concerns about consistency in execution and meeting stated objectives.
* Limited insider ownership, with management owning less than 5% of equity, potentially reducing alignment with shareholder interests.
* Lack of clear, publicly available information on sustainability-related performance metrics and incentives, which may be increasingly important to investors.
* As a pre-revenue company, Lipum faces inevitable share dilution and has not yet demonstrated consistent returns on invested capital.

* Strong leadership with CEO Ola Sandborgh bringing extensive industry experience and a clear vision for long-term growth and innovation in drug development.
* Lean, decentralized organization promoting efficiency and accountability, with a focus on cost-effective clinical development.
* Transparent and timely communication with investors, demonstrating openness about challenges and maintaining a long-term perspective on value creation.
* Founder involvement and presence of committed long-term owners, indicating alignment with shareholder interests and potential for sustained growth.
* Diverse and experienced board with strong independence, providing effective oversight and strategic guidance aligned with the company's goals.