BrainCool issue

Easter egg from BrainCool

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On Wednesday (April 5th) the trading of BrainCool shares were stopped in the late afternoon with no explanation. There were a number of theories on the internet ranging from the CEO has left with the remaining money to stories that the BrainCool System had received clearance from the Australian Department of Health. What made the latter theory credible was the links to the Australian homepage. This story received confirmation on Thursday morning before opening of Aktietorget and trading reopened at 9. Two and a half hour later, another press release came from BrainCool … a preferential rights issue in May.

The Australian clearance

Before we take a closer look at the issue, there are a few more things to say about the Australian clearance. First The BrainCool system has at present received clearance in Europe and Australia. The large markets are Japan and USA. The past years there have been some incidents with medical cooling where bacteria from the cooling device have infected patients. This is a problem with devices using water for cooling. The BrainCool System does not have this problem, which gives it a clear competitive advantage. The clearance for the US and Japanese market will probably come later this year.

The issue

By the end of 2016, almost all companies in my portfolio had made issues – both public and private – and I was so naïve to think that during 2017, the storm would calm and share prices in general would go up. So far, 3 out of 10 companies have announced issues in 2017. So much for calm.

The aim for BrainCool is to raise 58.5 MSEK in this preferential rights issue. The issue price is 5 SEK and current shareholders can subscribe 1 share per 2 current shares. Last date for obtaining warrants is May 8th. There are guarantees for 80 % of the amount.

As always the share price have suffered. The level the week prior to the announcement was a share price of 8 SEK. On Friday, it closed in 6.15 SEK, which is roughly a fourth down.

BrainCool in short

BrainCool works in five directions: Stroke, cardiac arrest, oral mucositis, concussion and migraine. The Australian clearance mentioned above were a clearance of the BrainCool System aimed at stroke and cardiac arrest. Later this year BrainCool has announced the handing over to the shareholders of a spin off. This spin off, called PolarCool will focus on concussion and in a broader sense on sports medicine. PolarCool will be listed later this year.

During the last part of 2016, BrainCool acquired BeneChill Inc., another company working with medical cooling. During this acquisition, BrainCool gained access to both the costumers of BeneChill and their clinical trials. The devices of BeneChill are smaller and can cool faster, whereas the BrainCool System can keep a very steady temperature for a long time. The company sees this as a competitive edge as the combination of devices can start the cooling before their competitors as on device fits for the ambulance and the other for the hospital.

So far, BrainCool has been able to generate a lot of clinical evidence to support the products. In my view, the weak point so far has been the commercial side. There are a lot of clinical trials going on, but absence of genuine turnover.

Change in business model?

I notice in the press release one sentence, that made me wonder. It says, ‘BrainCools aim with ongoing and planned clinical trials is both to raise the value of the projects and to raise the part of this value that will go to the company in a future license agreement or partnership.’ So far, the business model has been to sell system via distributors (Schiller in Austria and Eastern Europe and Fingal in Japan, so far). The above quote points to a change in strategy. The licencing model resembles more the model known from the pharma industry where smaller companies makes the scientific groundwork and Big Pharma makes the phase III studies and brings products to market.

Compared to Dignitana who decided to penetrate the market by themselves in the US, this strategy could work if there are big pharma-like companies willing to in-licence BrainCools products and bring them to market. If this is the case, turnover will show up faster than in the case of Dignitana, where the road to market has been long, expensive, and tedious for the investors.

Just two weeks ago, I wondered what would make the BrainCool share go up again. One thing I know for sure, it is not an issue …

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