10/11 Update

The second edition of my DD is out. Check it out!

Introduction

Progenity Inc. is a pharmaceutical company founded in 2010 that has made contribution to medicine developing therapeutic and diagnostic programs for women's health, gastrointestinal health, and oral biotheraputics. In May of 2020, After 10 years in the private sector, Progenity filed a prospectus with the SEC announcing its intention to go public.

PROG's prospectus included a disclosure of their principal stakeholders. The entity with the largest stake prior to its public debut was not CEO and Chairman, Harry Stylli (38.91%), but rather an asset management company named Athyrium Capital Managment (47.28%). It's managing partner, Jeffrey Ferrell, held a seat on the board of directors. Athyrium is a registered investment advisor that has invested in a number of pharmaceutical companies over the past 12 years.

Part 1: Athyrium the Investor

On June 19th, Progenity made its debut as a public company (PROG), raising $100 Million by selling 6.7 Million of its 45.16 Million outstanding shares in the Initial Public Offering to investors at $15 a share. Shortly after the IPO, Athyrium filed a disclosure with the SEC stating that it had acquired 22.9 Million shares (50.7%) of PROG.

The breakdown of Athyriums shares at this point along with the costs associated with those shares are as follows:

6/19/20 Estimated average price per share: $4.64

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2 weeks after PROG's debut, the stock lost nearly half of its value, falling to a low of $7.63. PROG made a small rebound, and for the next few months, PROG stock price generally remained around $9 a share. At the end of October, the price of PROG began dropping significantly. Over the course of the month, PROG lost nearly 60% of its value closing at $3.61 by December 1st.

On December 2nd, PROG announced an offering of 7.65 Million shares along with an option for an additional 1.15 Million shares at a price of $3.27 a share.

On December 9th, Athyrium filed another disclosure with the SEC stating that it purchased 4.13 Million shares of the 7.65 Million offering.

The breakdown is as follows:

12/2/20 Estimated average price per share: $4.43

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Shortly after the offering, the price of PROG began to rise, reaching a high of $7.55 on December 22nd. PROG experienced serious volatility over the next month until it hit a high of $7.86 on January 27, 2021. For the following next 5 months, the stock steadily descended, losing 2/3rds of its value until it stabilized around $2.50 in mid May.

In June, Athyrium filed 2 disclosure for the purchase of stock, one for June 3rd and one for June 14th. The breakdown is as follows:

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6/14/21 Estimated average price per share: $3.94

Part 2: Athyrium the Hydra

On June 21st, an amended Acquisition Statement was filed by Athyrium. One thing to understand is that Athyrium works through multiple sub-entities. The filings I had listed in Part 1 only represent the acquisition of shares from one of those entities. This Acquisition Statement however represent all of shares owned by the various Athyrium Sub-entities. All of these entities are represented by Jeffrey Ferrell.

According to the statement, Jeffrey Ferrell through all the Athyrium sub-entities owns 73,668,205 shares, which represents 64.2% of the outstanding shares. The reason why the reported share count was so low was that the other entities individually did not purchase enough shares in the company to be required to disclose those shares to the SEC. If you were an average investor, you would not have known about Jeffrey Ferrell's large stake until this statement.

What is the purpose of owning such a large stake? A look at their previous investments shows a common trend. Companies that Athyrium invests in tend to be acquired by other companies. Their case study in Verenium outlines the playbook. Take control of the company and make changes the structure of the company to make it financially attractive for an acquisition. Athyrium does not invest in companies so that they can succeed, they invest so that they can take control of the research, development, and products they produce and sell them at a discount to a trusted partner for a profit.

By the time PROG went public, Athyrium already had a larger stake than the chairman and the CEO of the company. We do not know if Athyrium had full control of the company at the beginning of its public life, but it was official on at the release of the statement on June 21st.

On September 1st, a report was filed with the SEC stating that the longtime CEO and chairman of PROG had resigned. According to the report.

Dr. Stylli’s decision was not the result of any dispute or disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Dr. Stylli plans to pursue other interests and remains one of the Company’s largest stockholders.

There was no press release. There was no news article mentioning this change. If you did not look at this report (which there are many of these types of reports posted regularly), you would not have known about this change. This lack of clarity should be a major red flag to every investor of this company.

Part 3: Shorting from the Inside

The original IPO investment Prospectus included an interesting section titled Stabilization. The section states:

The underwriters have advised us that, pursuant to Regulation M under the Exchange Act, certain persons participating in the offering may engage in short sale transactions, stabilizing transactions, syndicate covering transactions or the imposition of penalty bids in connection with this offering. These activities may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. Establishing short sales positions may involve either “covered” short sales or “naked” short sales.

This article gives Athyrium the legal right to short PROG while still maintaining your current shares.

When you short a company, you sell a stock that you do not own with the intent of buying it back at a later date. If you sell high, and buy low, you make a profit.

PROG's IPO was significantly higher than the average purchase price per share that Athyrium had paid. If the goal is for an acquisition, there are a couple of things that Athyrium needs to do.

1. It needs to acquire enough stock to have full control of PROG.
2. It needs to negotiate a selling price for PROG.
3. The selling price needs to be enticing for the company acquiring PROG.
4. The selling price needs to be high enough for Athyrium to make a profit.

If Athyriums average price per share is $4.64 at the IPO, they want to average down. This means find ways to force the stock price to go down and acquire shares.

Notice that the first major share offering after the IPO happens below that average price point? Athyrium buys shares and lowers average price per share.

This is true for almost every major share offering.

If you were PROG, and you wanted your buisness to succeed, why wait until after the price has dropped to offer shares? Does it not make more sense to offer shares when the price is higher so you can acquire more capital for your endeavors?

This is PROG's chart since it debuted as a public company. The blue line represents the offical reported Short Interest. The yellow line represents the estimated Short Interest % based on the companies free float.

You have the first major drop after the IPO. You then have the 2nd