Yet again we’ve had a busy day in the biotech space, with a number of companies gaining and declining on the back of positive or negative data. Here’s our take on two of the day’s biggest movers, and what we expect for each going forward. The two companies in focus are Vericel Corp (NASDAQ:VCEL) and Illumina, Inc. (NASDAQ:ILMN).
Before we get to the detail, a quick note.
Often, when we put together these biggest mover editions, at least one of the moves in question derives from something convoluted – a loose association, a failure in a similar field that sort of thing. Other times, the movements come from a piece of data relating to a clinical study, or the submission, decline or acceptance of a New Drug Application (NDA) with the FDA.
Not today. Instead, today’s two focus companies have moved for reasons not unique to the biotech space, and more related to the general publicly traded environment. So, here goes.
We’ll kick things of with Vericel. This one started the session yesterday trading for a little over $3 a share. By session close, it had declined to $2.6 a share – a 14% decline across the period in question. The decline came as the company filed with the SEC to announce (and register the fact) that it has entered into an “at the market” offering.
The offering will see register for sale, and sell, up to $25 million in shares from time to time, and that these raises will be used to fund general operational expenses.
Why would this impact valuation?
Raises require new shares to be issued, and when new shares are introduced to an outstanding pool, they eat into the value of the existing shares – it’s called dilution. It’s very common, but in some sectors it happens far more than others, and this sort of practice is heavily weighted towards the small cap space. Of course, that’s because the small cap companies are the ones that need to raise the money for growth (they often don’t have much cash on hand or a steady revenue stream) but dilution is dilution, and shareholders nearly always view such action as bearish.
In the biotech space, a company will often raise ahead of a key event, or with the intention of using the funds to drive a particular catalyst forward. This is what Vericel is likely doing (we expect it to use the proceeds to expand on its two commercialized products) and as such, the decline seen when a company dilutes is often an opportunity to get in ahead of a reversal to the upside. Why? Because the capital creates more value than the added share count takes away.
That said, let’s move on to Illumina. This one is just as simple, but its implications are a little more complex. The company put out preliminary financials for the third quarter of this year, noting that the data will come out lower than previously report as guidance.
The company estimated that revenues for the period will come in at circa $607 million, which is up around 10% on the $550 million recorded during the same period a year earlier. That’s good news, but the bad news is, and the reason Illumina has taken a hit, that the $607 million is down on previous guidance of $625 million to $630 million for the quarter.
A very vague reason was given for the decline in guidance – “larger than anticipated year-over-year decline in high throughput sequencing instruments” – which is essentially the same thing as saying sales were lower because they were lower than expected. Not really a reason at all, but then guidance is just that, guidance, and it’s not always going to be on point.
The company opened the session at $184 a share, and closed out at circa $138 – a 25% decline on the session.
This is a bit of an oversell in our opinion, and we are looking for a near to medium term recovery.