The stock closed Thursday at $17.43 -- quite a bit above the $12 price of the offering -- and on the news fell nearly 21% Friday afternoon to $13.81.
The drop is understandable. Current investors will face serious dilution to their stake as the company's count of shares outstanding rises from 13.9 million. And I'd sure like to have bought an initial position in this stock Friday rather than at the $15.71 price on March 14, when I recommended this stock for my Jubak’s Picks portfolio. That position is down 12% from my purchase price.
But although I believe the drop is understandable, I think it's, well, wrong. Or at least short-sighted.
Management sees a need to raise capital down the road, and is doing what it's supposed to do. It's taking advantage of a spike in the stock to raise capital at a good price.
Biotech companies raise capital for two reasons -- one bad and one good.
The bad reason is that the company is in danger of running out of money because its research is running behind schedule, or that the existing research direction has turned out to be a dead-end and a total reboot is necessary. Often in this scenario, a company will clearly have gone through a period of hoarding cash by cutting costs in an effort to get to a place in its research where it can show progress sufficient to go back to the market to raise more capital.
The good reason is that the company’s research is proceeding on or ahead of schedule. Biotech research gets more expensive as it moves out of the lab and into the regulatory and marketing phases. Clinical trials large enough to convince the U.S. Food & Drug Administration to approve a drug are expensive -- especially, as in this case, when a new drug has to prove that it produces a better outcome than existing drugs. Moving from trials to marketing is even more expensive.
Oncogenex’s partner, Teva Pharmaceutical Industries (TEVA -0.83%), will pick up the tab for a lot of that effort because it will do most of the marketing for OGX-011 after trials are completed in 2013 and the drug wins approval. But besides the $60 million upfront payment, and $370 million in potential milestone payments (and royalties on sales) that Oncogenex got in its deal with Teva, the company retained the right to co-promote the eventual drug in Canada and the United States.
It looks to me like Oncogenex wants to build a drug company and not just a lab. And the announced offer, painful as it may be at the moment, fits with that scenario. (You might ask, and I do, why did the company raise money Friday, instead of waiting for 2013? My guess is that this is a reaction to the incredible volatility of the last year. The lesson from that is take the money when the taking is good.)
Biotech stocks are volatile and this kind of event comes with the turf, I'm afraid. The short story is that if you liked the stock at $15.71 on March 14, you should like it even more at $13.81 Friday.
Whatever. The one thing that doesn't show up in any "fundamental" analysis of a stock is management credibility. The management of this company just blindsided its shareholders/Street. A week prior they explicitly said that they have adequate cash to last through 2014. A week after that they subsequently do a massive, dilutive deal. This, alone, has destroyed management credibility and will haunt the stock for the rest of the year, at least.
re "A week prior they explicitly said that they have adequate cash to last through 2014. A week after that they subsequently do a massive, dilutive deal."
The 2 are not contradictory. They had enough money to get them into 2014 but clearly to put 427 in the best position in terms of trials without a suboptimal partnership they saw an opportunity to jump in here on some strength. A lot of things are happening in terms of 427 in bladder CA with these early complete remissions and with the prostate CA landscape changing rapidly it's best to have the flexibility of that extra cash.
Look, I just got demolished as well, I didn't get in cheap but recently at around $16. But there really is a huge difference in jumping on the opportunity to raise cash that will only enhance shareholder value in the long run and raising cash from a position of weakness because you have to.
As much as I don't like to feel like an idiot and get blindsided I also know why I invested in this and that investment thesis only got stronger with this opportunistic capital raise that should prove to enhance shareholder value. When this offer is out of the way don't be surprised if the stock recovers quickly.