By Brian Marckx, CFA
In an 8K filing this morning Interleukin Genetics (OTC Markets:ILIU) announced that they've secured $3 million (~$2.7MM net) in new financing via the sale of 500k shares (@ $6.00/share) of their Series B convertible preferred stock and extended the maturity of the credit facility from Pyxis (from June 30, 2012) to November 30, 2012. These are huge positives as it eliminates (or at least postpones) the impending liquidity crunch that the company faced as a result of the company's dwindling cash balance and maturity of the credit line.
Subsequent to Q1 2012, Interleukin drew down the remaining $1.3 million available under the $14.3 million Pyxis credit facility. The loan was set to mature on June 30, 2012 which, along with a nearly negligible cash balance, raised obvious concerns. This morning's 8K notes that Interleukin successfully amended certain terms of the debt, including extending the maturity to November 30, 2012.
Delta Dental Plan of Michigan, part of the Renaissance Health Service network, purchased the Series B convertible preferred stock and will get a seat on ILIU's board. Each Series B preferred share is convertible at the option of the holder into 21.86 shares of common stock ($0.2745 conversion price) and, at the discretion of the board, is eligible to receive an 8% (non-cumulative) dividend.
The investment by Delta Dental is, in our opinion, a meaningful show of confidence in the potential for Interleukin's PST (periodontal disease) test. Renaissance / Delta is funding Interleukin's large PST test study which is being conducted by the University of Michigan. Data analysis of the study is ongoing, the results of which should be announced in the near-term. If the study results show what Interleukin believes it will (i.e. that PST can predict periodontal disease based on genotyping), it could be a useful tool in determining optimal dental care for each individual patient which includes the correct number of cleanings each year. This will hopefully support reimbursement for the PST test from dental insurance providers.
Renaissance Health, through its family of companies including Delta Dental, touches as many as 54 million covered lives. The current game plan is that, following data analysis of the U of M study results, Renaissance will introduce dental plans that cover cost of the PST test. Coverage of a second annual cleaning will be predicated on an individual testing negative on the PST test (everyone will have the first cleaning covered). Per the PST test, not everyone (~ 70%) benefits from a second cleaning so these new dental policies may offer lower premiums and can allocate insurance dollars towards more effective care. As we've discussed in our ongoing coverage of ILIU (Outperform, $1.30 price target), we think Interleukin's PST test may hold enormous potential and offer a multi-million dollar opportunity for the company. This investment by Delta Dental clearly indicates that we're not alone in our faith of the potential of the test.
To access a complimentary copy of the full ILIU research report, please visit scr.zacks.com.