|The Biotech Boogie
by Dave Reiner
Monday, June 7, 2010
It's always interesting to watch the antics of cash-strapped biotech stocks during their capital raising. The usual scenario goes like this: Letís say XYZís stock price is at a $1.00 per share and XYZís funder purchases stock at a 10% discount, or $.90 per share. Big exciting news is issued on stock XYZ and runs to $1.25 per share XYZís funder sells into the run-up and sells as much as possible down to whatever its accepted level of expected return is. But then the news of the financing hits the news wires and retail investors have discovered that there is an equity overhang of stock issued at $.90 per share. Panic ensues, short-sellers salivate and hit the bids with the former longs and not only does the stock go all the way back down to .90/share., it almost always goes lower than the financing price, leaving the poor retail investor that bought at $1.00 and above with whiplash and a stock portfolio thatís worth less if they failed to sell in time. There seems to be some sort of quid pro quo between financiers and biotech companies, or any company for that matter (the issuance of exciting news in conjunction with funding). But biotech seems to stand out a bit more because of the volatility that comes into play with this sector. And as usual, its the retail investor that gets hung out to dry in the short-term and maybe the long-term if the stock never recovers.
Today, the same scenario took place (only this time with the funding news coming first) with Harbor Bioscience (NASDAQ:HRBR). At 8:44 am eastern time, the Company announced it has entered into an agreement with institutional investors to raise approximately $2.06 million in gross proceeds through the sale of approximately 5.9 million shares of its common stock and warrants to purchase approximately 3.5 million shares of its common stock. The shares of common stock and warrants to purchase common stock were sold in units, with each unit consisting of one share of common stock and a warrant to purchase 0.6 of a share of common stock. The purchase price per unit was $0.35/share. As we can see from the chart of the days action, there was virtually no response to the stock up or down. However at 2:19 pm eastern time, the Company announced new positive data from its ongoing Phase I/IIa clinical trial with Apoptone(R) (HE3235) for castration resistant prostate cancer (CRPC), causing a momentary price jump followed by a massive sell-off below .30 from a high of roughly .51 per share. Usually you would see the sell-off of the stock on the funding news, but nothing happened until the Apoptone news was out. So for the retail investors watching the newswire, unaware of the earlier news about the financing, they thought they were probably getting a great deal, only to have the rug pulled out from them as the funders sold and short-sellers caused the stock to plummet.
Bottom line, when speculating on biotech stocks, know their cash positions and check their 8k filings for funding agreements! This will save you lots of aggravation and hopefully prevent losses. The Powers That Be always seem to be adept and taking the retail investor for a ride. Expand your awareness and you will prevail.