I previously blogged about financing risks associated with microcap biotech companies. In this post, I wanted examine a real-life example of a microcap biotech that recently had to raise capital.
On February 12th, ImmunoCellular Therapeutics (IMUC) raised approximately $14.6 million. Prior to the raise, IMUC shares were trading around $0.70/share; the stock price fell to about $0.57/share immediately after the financing – a drop of almost 20%. Should investors have known that there was a risk of getting diluted?
If you look at IMUC’s 10-Q, you see that the company had about $23.5 million in cash on September 30, 2014. The company’s historical burn rate was about $10 million a year, so by the end of 2014, IMUC would have had about 2 years of runway. Earlier in September 2014, management had announced the goal of initiating a Phase 3 trial in 2015. Management had stated that the Phase 3 trial could enroll 600 patients. The average cost for a Phase 3 cancer clinical trial is about $75,000 per patient, so the company needed approximately $45 million to fund just the Phase 3 trial. This should have raised red flags for investors.
Larry Smith had brought up concerns about financing, but the analyst covering IMUC at Roth Capital barely mentioned it. In his last note on November 14, 2014, the Roth analyst had a buy rating with a price target of $3/share. Which bank helped IMUC raise money in the last round? Roth Capital. Despite having a ‘Chinese Wall’ separating research from banking, sell-side analysts can still be hesitant to highlight a company’s risks fearing the loss of potential banking business.
Were there other warning signs? On December 11th, 2014, management filed an S-1 to try to raise $20 million. That didn’t work out so well, so IMUC tried to raise again on January 21st, 2015. This time, management wanted to raise $26.5 million but sweetened the pot with 30% warrant coverage. Again, institutional investors didn’t bite, so the company tried a third time on February 10th to raise $30.8 million with 70% warrant coverage. Ultimately, IMUC was only able to raise $14.6 million – enough to start the Phase 3 trial but not enough to complete it. Clearly, there was not much appetite from institutional investors.
What happens now that IMUC raised money? Institutional investors, such as Sabby, who received 26.65 million shares at $0.60, can now sell them anytime the price is $0.60 or more to get back what was originally invested and just keep their warrants for any upside in the future. This creates selling pressure around $0.60/share in the near-term until the institutional investors sell all of the stocks they received from the financing. Assuming half a million shares traded a day, it will take over 50 trading days for the new investors to sell all their shares. In the long-term, IMUC still has financing risk, since the company has to raise additional capital to finish its Phase 3 trial.
This example of financing will hopefully give you an idea of some warning signs to look out for before in investing in microcap biotech stocks.