We’re closing in on the end of the week, and it’s been another busy one in the biotechnology space. Here’s a look at which companies are moving, why, and how we see things playing out going forward for the companies in question.
The two companies we’re looking at today are Flexion Therapeutics, Inc. (NASDAQ:FLXN) and BioPharmX Corporation (NYSEMKT:BPMX).
So, kicking things off with Flexion, this one’s a classic example of buy the rumor, sell the fact. Back in March, reporters in the biotech space published suggestions that Flexion was poised to accept a buyout offer from a Big Pharma, with the prime candidate for suitor being Sanofi SA (ADR) (NYSE:SNY). Not only that, but the numbers being thrown around were in excess of $1 billion – a large premium to the then market cap and price per share.
Markets jumped on the rumor and bought the company up to the tune of nearly 50%.
Fast forward a few weeks, however, and things have changed. Flexion just announced that it is set to raise $125 million by means of a private convertible senior notes offering, with notes due 2024. This is bad news for two reasons. The first is the standard equity issue problem – dilution. The second, and likely the more serious in this instance, is the implications the raise has for the rumored buyout. Basically, it means the buyout isn’t happening. It’s highly unlikely that a company like Flexion would raise cash if it was poised to be bought out, and it’s even more unlikely that it would raise the cash through notes that don’t expire for seven years.
So, markets are selling off not just on the now unlikely chance of a premium being paid on the individual investor’s per-share holding, but also on the back of any value lost through dilution.
Not a great day for Flexion shareholders.
It’s not all bad news, however. These sorts of raises aren’t necessarily as dilutive as others, and that the company is raising means it feels it can go it alone on its pipeline. If it’s right, and it can, then the riskier strategy might pay off longer term. For the trader looking at a short term flip, however, it’s not a great situation.
Let’s move on.
The second stock on our list today is BioPharmX.
This one’s a little simpler that the above, but it’s also pretty similar in some regards. BioPharmX just announced that it is set to raise some funds through equity issue. Regular readers (and those familiar with the space) will already know what the implications are of this sort of announcement. For the newer readers, when a company raises capital like this it issues shares, and these shares will generally increase the number of outstanding shares in a company’s base. An increase in share base dilutes the value of the holdings of current shareholders, as their shares now represent a smaller portion of the overall company pie. For this reason, markets will often sell off on a company that announces a raise – as was the case with Flexion above, and as is the case here with BioPharmX.
It’s not ideal, but at this end of the markets, it’s often a necessary evil.
Companies need development capital, and this is one of the quickest and easiest ways to get it. What happens going forward is all about use of proceeds. If a company can put the money to use and carry itself to a catalyst that can potentially raise share price, dilution isn’t necessarily a bad thing.
So is that the case here?
Well, maybe. BioPharmX is set to put out data from an ongoing trial next month. The trial is a phase IIb, and it’s looking at the safety and efficacy of the company’s lead dermatology asset – a drug called BPX-01. It’s an acne indication, which is a notoriously tough target space, but one for which there’s a large potential market if a company can get an asset on shelves.
So that’s what we’re looking at as dictating this one’s value near term. If the phase IIb acne data comes out as indicative of efficacy in the indication, the dip from this dilutive announcement (which is around 10% as things stand) should quickly close, and we will likely see a run above and beyond the close soon after.
