Outback Update

The Pope has inaugurated a new holy year of mercy by opening the splendid doors of a Vatican chapel. He intoned (but not in Hebrew) the words of Psalm 118: Open for me the Gates of Righteousness. In Hebrew the same text is part of the Yom Kippur liturgy.

Because of the way the Hebrew imperative works, it require that God be male. The ch is pronounced like the Scottish gutteral in “loch”: Pitchu li shaaray tsedek.

Shaare tsedek is the oldest hospital in Jerusalem, founded before World War I by a German-Jewish nurse, which my family have been donating to for three generations. It is the one which did not depend on Bernie Madoff, unlike the Hadassah Hospital.

In preparation for the Fed's rate rise next week, China on Wednesday lowered the number of dollars in a renminbi to 6.414, effectively devaluing it. Still a major exporter, China wants to protect against losing business as the greenback rises with US interest rates. Separately, Chinese state-sector banks may need to sell $222 bn in bonds and $379 bn in common or preferred shares to meet the Tier Fund requirements of Basel II and the Financial Stability Board, according to Fitch Ratings.

However as part of the new internationalization of the renminbi, South Korea is issuing 3 bn yuan of sovereign “panda” bonds in China. Koreans often have RMB deposits for business reasons or to gain on interest rates.

And Russia plans an RMB bond in Moscow early next year to raise abut $1 bn.

Ten European Union member countries are proceeding with a Tobin tax plan, with Estonia, part of the original cabal, opting out. Britain will fight this one in the European Court of Justice, UK Chancellor of the Exchequeur George Osbornd told The Guardian newspaper. The Euro is up sharply against the pound sterling, perhaps as a result.

Benitec Biopharma etc

*The sacking of Peter French MD was presented as a decision over the nationality of the CEO of Benitec Biopharma (BNTC), but it was in fact over his mishandling of the alleged Nasdaq listing of the Australian small cap developer of DNA-directed RNA interference technology, initially to cure hepatitis C. It is in slow-moving US phase II trials and BNTC will eventually also move to human testing of its hepatitis B ddRNAi candidate as well.

Early this year, Benitec, then listed only in Australia, began the process of getting a Nasdaq listing and much-needed capital. Dr French, who like many doctors, is a bit of a know-it-all, undertook to rally US investors and beef up the Hep C trials in the USA. He apparently connected with a Canadian financial analyst at a respectable brokerage belonging to Royal Bank of Canada to write up the stock enthusiastically and help prepare the Q prospectus.

But things took longer than expected, like the trials themselves which have tested investor patience. And early in the summer, the Canadian analyst changed jobs (for reasons unknown) and RBC decided to drop the underwriting mandate. In any event it would have had to have a US partner to list in this country (although that is about to change.)

Dr. French then desperately tried to find a replacement underwriter. But the financial analyst community was by then in summer vacation mode, particularly during the hours when Australia is awake. Dr. French failed to use possible connections through investment banks in Australia or researchers working on BNTC's trials in the US, perhaps out of pride, perhaps out of fear of the US regulatory thicket. He also apparently kept his board in the dark about the problems.

At the end of July, without doing a proper investigation of its operations, Dr. French partnered with a US broker-dealer firm, called Maxim Group LLC, with office on Lexington Ave. in my fair city with another office in Red Bank NJ. It operates a separate Financial Advisory LLC. Maxim, est. in 2002, is licensed by the often-toothless Financial Industry Regulation Authority which investigated and fined Maxim for 19 customer and regulatory complaints against its methods. The fines come under consent decrees and allow Maxim neither admit nor deny the charges. It is also subject of complaints to the Better Business Bureau. It is regulated by Nasdaq and the NYSE Arca where it operates.

It is under investigation by the investment fraud law firm of Fitapelli Kurta for a bunch of violations but it is hardly alone. Fitapelli investigates brokers all the time to prosecute claims and earn contingency fees.

According to BrokerCheck, a Finra services, Maxim was fined regularly for violating Finra rules on excessive trading, short selling, order execution, and inaccurate reporting. In February of this year, a red flag arose about its role as an underwriter when Maxim paid $17,500 for accepting an underwriting fee before the start of a public sale of the securities under offer on the National Market System. By Maxim's standards this was a low fine.

Maxim while regulated by the Nasdaq, is not a Nasdaq underwriter. It has experience in offering corporate securities only on the pink sheets, the over-the-counter market, and via private placements, not the main Nasdaq system. It is authorized as a non-exchange member to arrange for transactions in listed securities by an exchange member—but not do so itself. Maxim does not hold or maintain funds to provide clearing services and clears through Pershing LLC, a sub of Mellon-Bank of New York, a leading depositary for American Depositary Receipts. However BNY and Pershing operate in different businesses.

Dr. French was under the gun. A major Australian investor in Benitech wanted to cash out. Dr French had lost his Canadian guru.

The US drug bubble was generating political opposition over the pricing of Hepatitis C drugs after Sovaldi and Harvoni were priced at stratospheric levels by Gilead. Benitech was aiming its own drug at the same disease.

So he signed up with Maxim to underwrite the issue of ADRs to be listed on Nasdaq, presumably after seeking legal advice, but I am not sure. In any event, like the mythical Crocodile Dundee, Dr. French was naive, arrogant, and befuddled, not helped by being a native speaker of English.

As the issue wended its way to market things got even rougher. The Chinese stock market dropped like a lead balloon on August 24, close to the Australian one in time zone and relationships. Benitec used Chinese labs for drug development and also planned to launch an eventual cure for hepatitis C in the country where the disease is endemic, China again. So Dr French let the deal go through despite some loopholes apparently left in the contract with Maxim. And he sweetened the deal with the underwriter by allowing it to not only cash in from a 15% stock green shoe option, standard in the business, but also to gain from supposedly attached warrants to purchase additional shares at a higher price than that of the ipo.

The way things went was not however according to Dr. French's expectations. The first sign of trouble was that Maxim Group kept the warrants, supposedly listed on Q as BNTCW. They out of the market and not attached to the newly issued shares. Your editor could not get warrants when she bought the stock, presumably because there was a loophole in the prospectus.

Things got even worse as the supposed Nasdaq trading started early. There were in fact no US ADRs, and no depositary bank. Instead, Australian shares were converted by Maxim ad hoc into ADRs for meeting US demand, at fees imposed on Benitec. Maxim also acted as sole market-maker for the US shares, which it priced at a large spread, to cover the risk of conversion from the Sydney stock exchange shares.

The large spread and the illiquidity of the supposedly listed ADRs resulted in the delisting of both BNTC and BNTCW (the warrants) late in November. They now trade on the pink sheets and have failed to garner the US interest that the listing was supposed to produce. Moreover, with the terms imposed by Maxim, the amount raised by the ipo was about 40% of what it was supposed to produce. The $12 issue price is now only a dream. Even before Dr. French was forced out the stock was trading around $4.50-4.60.

The lesson to draw is that even a highly qualified doctor, perhaps like Dr Ben Carson, may wind up out of his depth. Dr. French was.

The other lesson is that the highly legalistic US underwriting process needs to be followed in full with enough time and advisors to get things right.

The third lesson is (I hope) that Benitec's products should not be affected by the problems of its listing history. I assume that the slow phase II trials were crafted using good medical advice, among other things because this was easier to arrange and he was qualified to do it. The trials are signing up Hep C patients with no “co-morbidities” for which Dr. French has also been criticized. This means those getting the ddRNAi may not have other liver issues like HIV, drug-addiction, or alcoholism, which would require that the BNTC drug be used in combination with an existing therapy. By finding patients with Hep C alone, BNTC can test its drug solo, which offers the best chances of a clear outcome, if it works.

There are people with no co-morbidities who have Hep C. Among them was the late King Baudouin of Belgium. It can be transmitted by a mosquito bite or by a mother to her baby during childbirth.

BNTC was down another 2.4% on Wednesday.

*Galapagos (GLPG) was bought back on Tuesday at $56.95 and rose 4% on Wednesday aiming at $58. I am going to stop my habit of judging awkward Euroland self-promoters like Americans. GLPG.

*Reckitt Benckiser (RBGPF) won a higher target price of GBX6600 from Morgan Stanleyanalysts. That is $99.25 at this week's exchange rate. It is a consumer goods seller in Asia not tracked by the Normura team because of being British, if run by an Indian.

*Bank of America Merrill Lynch upgraded GlaxoSmithKline (GSK) from neutral to buy on Wednesday.

*Alkermes (ALKS) CEO Richard Pops sold $2.7 mn worth of its shares as reported to the SEC.

Nomura Ideas

*I promised to give you a rundown of the tips by Nomura brokers for 2016. They overweight South Korea, India, Taiwan, and Singapore, and underweight Australia (where we have just bought into a bond fund), Hong Kong (but not HK operators in China), Malaysia, Indonesia, and Thailand. The rest of the region is neutral. By sector they love banks and insurance, IT, and industrial and consumer goods best. They avoid companies with debt to equity of over 35% or return on equity of under 18.3%.

Their India picks include Tata Motors, (TTM), recently sold, but easy to buy back, and also Axis Bank, with no ADRs.

They also like beaten down Dr Reddy's Pharma, (RDY), which has run into problems with US regulators which they say are overblown. They expect new softgels, tropicals and transdermals not from the banned facility to gain market share. It was off another 4% on Wednesday in US trading hitting a 52-wk low.

They also recommend Infosys, (INFY) and a NJ firm which offers IT in India,Cognizant Tech, CTSH, both of which I own and have recommended here

They like AIS in Thailand and SingTel, both telcos with pink sheet ADRs, AVIFY and SGAPY.

In Korea they prefer Hana to Shinhan Financial (SHG) but it has no ADRs. They recommendSamsung and SK Hynix (with seasoned institutional GDRs) plus LG Display, NYSE-LPL.

In China they like movie theater chain IMAX (HK 1970). They prefer China Pacificto AIA in insurance. And of course they recommend Tencent, TZTCF.

In Singapore they like Raffles Medical (RO1 on the SGX.)

Other News

*Oil recovery has boosted the price of Schlumberger Ltd (SLB) by 2.5% on Wednesday Ecopetrolis up 4.4%.

*JP Morgan Chase is now covering Noble Energy, NBL, the partner of Delek Group (DGRLY) in Israeli offshore, with an initial overweight rating and a $42 price target. It is now at $32.

*The derailed impeachment of Dilma Rousseff in Brazil has upped the price of VALE (VALE) by over 5.1%.

*Also up is Cosan by 4.35% CZZ.

*Bank of Nova Scotia will issue in Canada C$ 30 mn of non-cumulative 5-yr preferreds for which it is the lead underwriters. The yield is 5.5%.

Upgrades and Downgrades

*RBC analysts now rate the Nasdaq OMX Group (about to take over a Canadian market) at outperform with a 20% higher target price than its current $57. It is among the holdings of Investor AB of Sweden, a holding company in our fund portfolio, IVSBF.

*Momentum trackers Zacks slashed CRH plc to sell from neutral on Wednesday. The Irish firm makes cement and aggregates and is a play on infrastructure spending here and in Europe. It is the second largest holding of New Ireland Fund or IRL.

Fund Notes

*Canadian General Invstments declared a special dividend of 20 loony cents payableDec. 29 to shareholders of record Dec. 23, of capital gains. There will be no withholding tax on US owners.

*Our dollar long holding Power Shares DB USD Bull or (UUP) was sold just in time. The US$ is falling against sterling and yen while it is still up against the loony and the Aussie for now. It is now at $25.32.

*As if he did not have enough on his plate, Bill Ackman of Pershing Square (PSHZF)  is now getting involved in the Canadian Pacific bid for Norfolk Southern.

*Merrill Lynch's liking for Mexico as the best in a bad bunch has boosted Fibra Uno, (FBASF),on Wednesday. The thundering herd has inpact. It is up 2.6%.