The other day I asked if anyone knew how many shares Insmed was authorized to issue. I found the following in the Annual Report given in March of this year:
Common stock; $.01 par value; 500,000,000 authorized shares, 31,488,204 and 24,833,301 issued and outstanding shares at December 31, 2012 and 2011, respectively
So, based upon the information above, I have a couple questions:
1) isn't it a moot point to get upset about dilution if Insmed can keep issuing up to 500,000,000 shares?
2) what difference does it really make to someone (like myself) how many shares are issued if one's target price is met?
the controversy about dilution boils down to the question of INSM's managements ability to make good (ultimately profitable) use of invested capital. "Good use" would result in capital appreciation and an expansion of market cap well beyond the additional invested capital. With dilution, traders may take a hit, as they did temporarily with INSM. In the long run, investors will not be hurt by the dilution if management delivers. (Biotech investors in second rate companies -- see DSCO as an example -- are right to fear dilution because the management of such companies treat the dilution machine as their ATM and pension plan.) I'd say the jury is still out on INSM's management (first rate or second rate?) since the company has never brought a product to the market, among other reasons.
Those here who say "what difference does it make if your price target is achieved?" are ... dim-witted and naive. or perhaps they should just be called realistic retail investors of a certain stripe.
If you own 1000 shares of ABC with 50M shares outstanding and the price hits 100, then your shares are worth $100K. If on the other hand you own 1000 of ABC with 100M shares outstanding and the price hits 100, then your shares are only worth $100K. So when your % ownership is halved, as in this example, and the target price is hit, you take a valuation hit of 0%.
The same holds true on income stocks and it is easier to see in a 2 stock example. Say you own 1000 shares of Alpha, which is 10% ownership in the company and 1000 shares of Beta, which is 1% ownership of the company. If Alpha and Beta both declare a $1 div/share, you would receive a dividend check from Alpha of $1000, while you would only receive a $1000 dividend check from Beta. In both cases, the IRS comes calling.
But now let’s look at from a completely different perspective…arbitrage and a possible acquisition. Let’s say Company Gamma has 100M shares outstanding, which are currently priced at $10/share resulting in a valuation of $1B. If Omega comes along and offers a 10% premium on the acquisition ($1.1B) those shares become worth $11/share. Now let’s assume Gamma had issued 50M shares prior to a buyout so that there are 150M shares priced at $10/share, the net effect is to increase the value of the company. Omega comes along and offers a 10% premium in the acquisition pushing the valuation to $1.65B. Now your original 1000 shares become worth $11 per share.
So, now let me ask you. If one’s target price is hit and you subsequently sell your shares, what difference does it make if your 1000 shares were 1% of the company or 10%?
If you sold your shares of ABC for a net profit of 100k before Bernanke started the QE process, how much more would you be able buy than if you netted the same 100k by selling ABC today following trillions of printed Bernanke candy?
Sentiment: Strong Buy
I'll make this even easier for both camps.
1. If Insmed is worth $1B and has 30M shares outstanding each share is worth $33. If Insmed is worth $1B and has 36M shares outstanding each share is worth $27.70.
2. If by issuing an additional 6M shares, Insmed is able to secure its development and marketing future, and due to that insight can grow the company unencumbered by financial risk and ultimately become a successful pharmaceutical company whose stock then grows in value to lofty heights, we should then look back and say "ah, good move Will."
Compare the following two scenarios for raising the funding required to get to the stage where Arikace is generating revenue -
1. A single 20% dilution - from 26 million shares to 31 million shares
2. Three 20% dilutions - from 26 million shares to 45 million shares
For somebody with a target of ... let's say $180 ... the market cap would have to reach -
1. $5.58 billion - annual revenue of $930 million - 25,833 patients using Arikace
2. $8.10 billion - annual revenue of $1.35 billion - 37,500 patients using Arikace.
Provided Arikace is approved for NTM one wouldn't expect much of an additional delay to get from 1 to 2. But investors with significantly higher price targets may have to wait several additional years because of the additional shares issued.
An additional problem is that each offering not only provides an incentive for interested investors to run the price down in order to receive lots more shares for the capital they invest - it eliminates demand for several million shares on the open market which would otherwise drive share price appreciation.
Only buying pressure will drive a share price to a generally accepted market valuation - which is why the share price is where it is instead of well above $50 with this Phase III success.
Dilution reduces ones ownership percentage. If you had 10 shares of XYZ and there were a total of 100 shares issued, your ownership is 10%. However, if XYZ decides to raise capital (for whatever reason) and decides to issue an additional 100 shares from its authorized stock, then your ownership is reduced to 5% (all other things being equal).