Oculus Innovative Sciences Banking Millions on Ruthigen-Pulmatrix Merger

Funding can be a tricky creature for companies as investors despise hearing the word dilution, but want to see a portfolio company develop products and expand, creating a huge catch-22 situation, especially for small capitalized firms. Whether stakeholders want to hear it or not, the reality is that incentives are generally needed in a funding, and that's not always a bad thing if it provides the necessary capital to grow a promising technology, product or service. How investors perceive cash coming in can be a bit of a crapshoot. For example, Wall Street didn't respond favorably to Silver Wheaton's SLW $800 million bought-deal financing selling shares at $20.55 (when shares were at $21.50) to buy an additional 25% gold stream from Vale S.A.'s Salobo Mine, but cheered a $31 million private placement recently announced by Minerva Neurosciences NERV offering shares at $4.81 (when shares were at $4.81) and warrants exercisable at $5.772 to fund clinical development of the company's Central Nervous System pipeline of drugs.

Building cash reserves in about the most favorable way possible, Oculus Innovative Sciences OCLS announced on March 16 that it is padding its bank account without any dilution by selling part, and eventually all, of its stake in Ruthigen RTGN, a company it spun out into a separate public entity last year. Some may have seen this coming as Oculus said in January that it penned an agreement to sell two million shares of RTGN for $5.5 million to existing Ruthigen shareholders "if" a merger happens for Ruthigen.

The Non-Dilutive Funding

A merger indeed did happen, with Ruthigen announcing a definitive merger agreement with the clinical stage biotech Pulmatrix, triggering the sale of RTGN stock by Oculus. In part one of the sale, Oculus sold 350,000 shares of RTGN at $2.75 per share for a non-dilutive funding of $962,500. Upon closing of the merger, which is anticipated before August, Oculus will sell its remaining 1.65 million shares at $2.75 each for an additional $4.5 million.

That's not the end of the Ruthigen/Pulmatrix/Oculus relationship. Ruthigen licensed certain Oculus assets and still has an obligation to make a total of $8 million in payments upon the anti-infective RUT58-60 meeting certain developmental milestones. The first payment of $1.5 million is due upon completion of enrollment in the Phase 1/2 clinical trial for abdominal surgery patients that commenced in the fall of 2014. Further, Ruthigen is expected to make royalty payments between 3%-20% (tiered by volume and geography) to Oculus should products built upon Oculus' Microcyn® Technology eventually gain regulatory approvals and be commercialized.

So Now What?

In the Ruthigen/Pulmatrix merger, Ruthigen is effectively being absorbed, with "Pulmatrix" being the name of the combined public entity and the headquarters staying in Lexington, Massachusetts, Pulmatrix's current home base. Further, current Pulmatrix President and CEO Dr. Robert Clarke will hold those positions in the new company.

Pulmatrix, who has a highly experienced and accomplished team of executives and directors, has some decisions to make with respect to the drug formulations licensed from Oculus. Unless something unexpected pops up, there are really only three options. One, Pulmatrix will be on the hook for the previously agreed upon future milestone payments and royalties should they move forward with development of drugs built upon Microcyn® Technology. Two, Pulmatrix sells the licensing rights to another anti-infective biotech, who then is responsible for the payments to Oculus. Given the dire need for new anti-infective drugs, there may be strong interest in the technology considering companies like Tetraphase TTPH are seeing a stark appreciation in share price and a major like Merck MRK just spent $8.4 billion to acquire Cubist Pharmaceuticals to reignite its pipeline for infectious conditions. Three, Pulmatrix holds tight with developing its own pipeline founded on its iSPERSE technology and the license comes back exclusively to Oculus. Pulmatrix has until next August 31, 2016 to decide or the license automatically reverts to Oculus.

Cash Now and The Assets Remain the Same

The Ruthigen merger ultimately works out well for everyone. Pulmatrix comes public and Oculus will add $5.5 million to its coffers without having to issue a single share of stock. The infusion of $1.0 million in cash from part one of the RTGN divesture added to the $5.3 million raised in January plus the $2.2 million on hand at the end of 2014 (plus revenue in 2015, less expenses) has Oculus' cash on hand nearing its $11.8 million market capitalization. Oculus says that it plans to use part of this capital to expand its new dermatology business, IntraDerm Pharmaceuticals, which, in the words of Oculus COO and CFO Robert Miller, "has already exceeded our expectations in terms of its introduction of new derm formulations for the management of atopic dermatitis and scars." Meanwhile, the license for development of Microcyn®-based surgical drugs remains intact or returns to Oculus, putting the asset 100% back under its umbrella. In the interim, Oculus will continue to generate revenue by marketing products globally formulated on the Microcyn® Technology. This should grow the value of the platform technology and make it more appealing to potential partners should it return to Oculus and the company decide to shop it in the future.

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