Will buying back 25% of outstanding shares send this illiquid stock higher?

What happens when an illiquid stock initiates an on-market buy-back of up to 25% of its outstanding shares? Well we’re about to find out.

Cyclopharm (ASX: CYC) is an Australian radiopharmaceutical company that develops and commercialises products for the diagnosis and treatment of cancer and other diseases. The company has key business segments:

• Technegas – Diagnoses pulmonary embolism (PE), which refers to the blockage of an artery in the lungs 

• Molecular Imaging – Cyclopharm has various molecular imaging products that are in various stages of development that have the potential to disrupt the way that cancer and other diseases are diagnosed and treated

The business is loss making – posting a $6.6 million net loss for the year ended 31 December 2022, which includes $3 million of expenses associated with seeking US FDA approval for Technegas.

Its top line is fast growing as revenues rose 31.1% to $23.2 million over the same period. The approval of Technegas is viewed as a major growth catalyst, with management describing it as “the major opportunity to significantly grow sales and profitability in the United States market.”

What makes the buy-back interesting

Cyclopharm has approximately 93.8 million shares on issue, so the 25% buy-back would take around 23.5 million shares off the market.

This process is easier said than done for illiquid stocks, which refers to characteristics such as:

• Large bid and offer spreads

• Large spreads between each bid

• Bids may not have much volume

The Buyers and Sellers table below illustrates how there are approximately 220,000 shares for sale – ranging from $2.140 to $3.590.

Data as at 11:30 am AEST on 18 May 2023 (Source: Commsec)

And Cyclopharm wants to buy back 23.5 million shares. That’s 100 times the amount of shares that are up for sale right now.

How will the company achieve this without substantially pushing up its share price? 

What else should investors know?

The buy-back is expected to commence on 16 May 2023 and proposed to finish by 15 May 2024. The company likely opted for a long buy-back period to reflect the illiquid nature of the stock. 

It’s also worth noting that Cyclopharm is not yet profitable. At the end of 31 December 2022, the company had $20.3 million cash in the bank.

Management commentary during the company’s half-year results in August 2022 was very optimistic about the outlook for Technegas:

“The Board remains highly confident that demand for Technegas will continue to grow across our existing markets. Clinicians reiterate their strong support for Technegas as the functional ventilation imaging agent of choice in determining PE.”

“Significant opportunities exist for the Company to grow its sales through accessing new markets, including the USA, and expanding the use of Technegas to conditions such as COPD and long COVID.”

Given the above circumstances, it sounds like all the pieces of the puzzle need to fall into place for a smooth buy-back. But will they? Let’s see how this story plays out.