Price Target: $26
What's the Angle: The 180-day lockup period for Patheon N.V. (PTHN) is scheduled to expire on Jan. 17, 2017. When it expires, PTHN's pre-IPO insiders, institutional shareholders and executives to sell their 110 million pre-IPO shares. This is equivalent to approximately 76% of the total shares outstanding. Any significant sales would flood the market and result in a sharp decrease in the share price.
Our firm has been following the impact of lockup expirations for some time and we have found abnormal negative returns of 4.2% in the two weeks surrounding many lockup expirations especially when the following factors are present: (1) there are a significant number of insiders who own a meaningful number of shares and (2) the company has strong fundamentals and (3) the stock's IPO performance and performance since IPO are positive.
How to:
Because these factors are present for PTHN, we expect to see some of these insiders cash in when the lockup expires. We believe this will cause a sharp decline in Patheon share price around January 17, 2017.
Investors should establish a short position over the next several sessions. Investors should cover their position after the lockup expires on January 17, 2017.
Strategy Notes:
Fundamentals and Financial Performance
Patheon N.V. is a global provider of outsourced pharmaceutical manufacturing and development services. Based in Amsterdam, Patheon is one of the biggest contract drug manufacturers in the world and is the only pharmaceutical manufacturing and development company that offers fully integrated services from start to finish for its customers. Services include: manufacturing, logistics, and packaging of conventional dosage forms, sterile dosage forms, and specialized products.
Management team highlights
The chief executive officer and executive director of Patheon N.V. is James Mullen, who joined the company in Feb. 2011. Before that, Mullen had more than 30 years of experience in the pharmaceutical industry, including 20 in executive-level positions. He served as the chief executive officer and president of Biogen Idec Inc. from 2000 to 2010, and he held a variety of executive roles at the company before that.
Michael Lagarde has served as the president of Patheon N.V. since joining the company in May 2016. Before that, he served as the managing director of JLL Partners from 2008 until 2016 and as the chief executive officer of Phillips Electronics North America from 2006 until 2007. He was the chief financial officer of the domestic appliance and personal care division of Phillips Electronics North America from 2004 until 2006 and held a variety of other positions since joining the company in 1996.
Strong IPO Performance
Shares of PTHN went public on July 20, 2016. Through its IPO, Patheon raised and $625 million offering 29.8 million shares. Shares were priced at $21 per share toward the upper end of its marketed price range of $19 to $22. During its marketing debut, the share price rose to close at $24.99, a 19% increase, and then an additional 13.3% in after-market return.
We believe that this strong performance will make significant insiders even more eager to cash in on their gains.
Bottom Line:
Given the company's strong performance and significant price increase of 34% since the company went IPO, pre-IPO shareholders will likely want to cash in on their share at the first possible opportunity: when the lockup expires on January 17.
If these shareholders sell even a portion of their 110 million shares, it would likely significantly impact share price, given their large ownership of ~76% of shares outstanding.
We recommend that investors establish a short position during the next several trading sessions. These investors should then cover their short positions after the IPO lockup expires on January 17.
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