The latest fear plaguing biotech boardrooms isn’t a failed experiment or a huge financial push, but a postman delivering a Nasdaq letter warning that a company’s stock is in danger of being wiped out.
This seems to be an increasingly common occurrence. Nasdaq data show that in the last few months of last year, the number of drug developers warning that they may have to go public, a requirement if the company’s share price falls below $1, has increased. In October alone, 23 biotech companies received the dreaded stock market warning letter. A recovery after a “year of deep decline” in the fourth quarter of 2022 saved major drug ratings, but the biotech industry remains in a “shaky” position, according to the latest report from Evaluate Vantage.
“For the year, only a fifth of 532 small-cap stocks entered positive territory,” the report’s authors wrote last month. “The big contenders would have regained their mojo, but outside of this group, 2023 promises to be tough, floor or no floor.”
So far, this year doesn’t seem to be disappointing. Sesen Bio disclosed in January that it faced delisting following the closure of its Phase 3 targets in bladder cancer and attributed the news to its decision to merge with Carisma Therapeutics. In February, ObsEva blocked the IPO, firing US executives and retreating to Switzerland.
Kevin Eisele, managing director of equity capital markets at investment bank William Blair, believed that after the biotech “sugar rush” of recent years, valuations across the sector were headed for an inevitable crash.
“This is not a knock on the platforms or the science. The question is really when they were announced,” he said in an interview. “There are a lot of companies that have gone public that have honestly had 18, 24 months [of researching a new drug application].”
“So when investors think about what’s driving this, do you want to keep your dollars in a company that might not change in the next couple of years?” More to come. “Or are you going to reallocate those dollars to something that has a data event in the next three to four months?”
Not all biotechnologies need to take such radical steps. Some companies, including Addex Therapeutics, are able to come back from the brink. The Geneva-based biotech ran into trouble when COVID-19 headwinds blew up trials of an allosteric modulator for Parkinson’s disease last June, sending shares below $1. Soon, a letter from Nasdaq arrived at the door.
CEO Tim Dyer’s first move was to reassure investors.
“We have partnerships with Janssen and many other reasons why investors should be bullish on the stock,” Dyer said in an interview with Fierce Biotech. “Obviously, if you disappoint that main asset, you have to go in there and reassure them, tell them what else is out there, and then rebuild some confidence.”
Biotechnologies still have time, even if they face extinction. Nasdaq gives companies 180 days to comply — that is, get their shares back above the $1 mark — with an option to extend another 180 days.
Apart from the reputational damage, removal also has practical disadvantages. “The bankers told us that non-compliance means some funds can’t buy your shares,” says Dyer. “So the bankers encouraged us to go and figure it out as quickly as possible.”
One increasingly common way for biotechs to avoid going public is through reverse stock splits. In this case, the company raises its share price by reducing the number of shares outstanding by a certain ratio, for example, by exchanging every other existing share for one share. Dyer was advised to take this route.
“One of the reasons the banks wanted us to do this is because they said, ‘If you do this, we can use this as a marketing tool to get your capital,'” he explains. “You’ve seen a lot of companies do this and raise capital.”
Depending on the agreement with the custodian bank, reverse stock splits can result in “pretty big fees,” Dyer says. “That’s something we didn’t want to spend.
According to William Blair’s Eisele, this isn’t necessarily a bad thing for companies going through reverse stock splits.
“No biotech will ever die from dilution, but from lack of funding,” he says. “Whether it’s going public to save costs [or] going public to save regulatory and public costs, just to fund an extra quarter or two to get to a data point that you really need to move the company forward.”
Instead of shorting shares, Addex’s approach to investors was based on clear and positive communication about the company’s other add-on programs and how they planned to “tighten” the cash burn, Dyer says. “I went to a few conferences, but not many. In fact, I wanted to repeat that message every time we released the financial results.”
“Now, I didn’t make the deal I promised everyone,” he admits. “But I think people see the portfolio; they’ve already seen our experience in doing deals, and we believe it’s doable.”
While this heart-and-mind strategy didn’t immediately hit the stock price, Addex shares began to recover earlier this year, which coincided nicely with Janssen’s recruitment of Addex’s Phase I. 2 trial. Epilepsy treatment ADX71149. Biotech stock’s price is now $1.20, down from 55 cents a piece just before Christmas.
For biotech executives losing sleep over their stuttering stock prices, Dyer’s gentle take on a potential IPO can be reassuring: “It’s not a big deal if you believe in your company and your strategy.”
“The market is what the market is. Over the last decade, we’ve seen this huge difference in real value.
