Neurosearch - a different 'investment' case

There is a company Neurosearch listed on the Danish stock exchange that is now potentially very interesting to invest in. This is normally not the type of company that I invest in as this is clearly a 'cigar-butt' type of investment with the feature that this cigar either has no fire in it at all (and it will only cause me to feel ill for having picked it up) or that the last puff will be very rewarding.

In summary, this company is in practice under 'liquidation' and have come very far in that process. The number of employees were two at end of 2013. The asset side is now (for all practical purposes) only compromised by cash and cash equivalent (of 87 MDKK) and the liabilities side (for all practical purposes) of equity only in the corresponding value. All other assets have been written down to a zero value. The company has 24,554 million shares.

With a annual burn rate of 10 MDKK (as announced by management) during the ongoing 'liquidation' and litigation process, the share price at end of July should be about 3,30 DKK if just valuing the company by its cash assets.

The key issue until now has been the trial regarding share manipulation in 2010. Today the verdict came and the ruling was that the company was found guilty of share price manipulation contrary to the rules of the Danish Securities Trading Act. The company was ordered to pay a fine of 5 MDKK.
The company now has two weeks to decide whether to appeal the District Court judgment to the Danish High Court. Hence the current asset value of the company at the moment after this verdict should be (in my opinion) somewhere around 3,10 DKK / share (excluding 'option value' described below).

The interesting thing is that there is a big upside in this company as all other assets have been written down to zero value in the books during the 'liquidation' process. Without going into details on the minor items (e.g. potential milestone payments of 55 MDKK relating to the development of Huntexil^®), the large item remaining is the deferred tax asset that could potentially be sold (most likely through selling the whole company). Some of the details regarding the deferred tax assets are as follows:

In the latest financial update (April 30th, 2014) the following is mentioned:
"In addition, NeuroSearch calculated the value as of 31 December 2013 of its unrecognised tax losses carried forward at approximately DKK 1.8 billion, and deductible temporary differences at approximately DKK 0.5 billion, or a total of DKK 2.3 billion. Under certain conditions, the unrecognised tax assets may be exploited in full or in part by a potential buyer of NeuroSearch."
And in the Annual Report 2013 (p30): "As of 31 December 2013, the Group had tax loss es carried forward totalling approximately DKK 1,800 million which can be carried forward indefinitely. In addition, the Group had deductible temporary differences (net) of approximately DKK 473 million, totalling DKK 2,273 million. The carrying amount of unrecognised deferred tax assets was approximately DKK 500 million for the Group at a tax rate of 22%" 

To summarize; these 'hidden assets' have a gross value of about 20 DKK per share. I do not believe that in case of a transaction this full value would come to the benefit of the current shareholders, but rather a smaller but still substantial part of this.


Based on this I see a downside (with very high likelihood) but limited to some 5-10% in the upcoming year. At the same time I see a potential upside (with much more limited likelihood) of 100%++ in the same timeframe. For me, this is the type of 'lottery ticket' I like to buy (intrinsic value is somewhere between 3-23 DKK per share). Therefore I currently hold a smaller position in the stock. The stock closed at 3,25 DKK today.