The biotechnology sector is an important one, both for the financial industry as a whole, and for the extension of human life. It can be argued that we’re in the midst of a medical renaissance. As a result of the overwhelming value newly approved medicines represent, clinical-stage biotechnology companies garner incredible investment interest from both institutional and retail investors alike. However, there’s a dark cloud surrounding the clinical stage biotechnology sector. That cloud is the public offering. Nonetheless, these public offerings are a necessary evil.
What Is A Public Offering Of Common Stock?
A public offering of common stock is essentially an attempt to raise funds from the public through newly issued shares of common stock. Essentially, the publicly traded company would theoretically print new shares. From there, the company assignings them a value and sells them to the public in an attempt to raise capital.
Why Do Public Offerings Lead To Declines?
When a publicly traded company announces a public offering of common stock, we tend to see declines in its value. The reason is that these public offerings ultimately dilute shares, causing already outstanding shares to be less valuable.
What Is Dilution In The Stock Market?
Dilution takes place when a publicly traded company issues new shares. In doing so, the total amount of issued shares rises without being influenced by an increase in the market capitalization of the company. Therefore, the value of each individual share declines. Consider shares like slices of pie. When a new slice is added, everyone else’s slice gets a little smaller.
Why Public Offerings Of Common Stock Are A Necessary Evil In The Biotechnology Sector
The clinical stage biotechnology sector is one that warrants incredible interest among investors. However, it’s a very interesting one from a financial standpoint. That’s because a clinical stage biotechnology company simply doesn’t make money. Instead, these companies rely on public funds, bank loans, and other sources of outside funding. Without this funding these companies wouldn’t have the ability to bring products to the market.
Because of the fact that clinical stage biotechnology companies can’t make money through the sale of their products without regulatory approval, they tend to launch public offerings of common stock in order to cover the overwhelmingly high expenses associated with bringing a treatment to market. In fact, through my work in the market, I’ve found that if a public offering is going to take place in a clinical stage biotechnology company, you can almost always predict when it is coming.
Predicting Coming Clinical Stage Biotechnology Public Offerings Of Common Stock
If you’re interested in a clinical-stage biotechnology company and wondering if they are going to launch a public offering of common stock, here’s how you can go about figuring it out with around 90% certainty:
- Look At The Financials – A company with money to spend to continue operations and clinical trials is not going to want to reach out to the market with a dilutive offering in an attempt to raise funds. So, it’s important to dig into the financial data. In particular, look at cash on hand and the cash burn rate. With few exceptions, comparing cash on hand to the cash burn rate will tell you about how long the company can afford to stay afloat without looking for funds.
- Look For Recent Announcements Funding – Often times, publicly traded companies will look to financial institutions for funding. However, doing so takes time, and you may be doing your research with outdated financial data. So, dig around in the press releases issued by the company you’re interested in to see if there have been any injections of funding by means other than public offerings. These include bank loans, the sale of assets, milestone payments and more.
- Look For A Coming News Release – If you find a clinical-stage biotechnology company that doesn’t seem to have the money to survive, you’ve likely found a company that’s on the brink of a public offering of common stock. In general, clinical stage biotechnology companies will announce their public offerings within a few trading sessions of announcing positive news. So, look for positive news, and keep in mind that shortly after the news drops, chances are that there will be news of an offering.
Using This To Your Advantage
While in other sectors public offerings of common stock are red flags, in the clinical stage biotechnology space, that’s not always the case. In fact, often times, they represent an opportunity. Here’s how to use this information to your advantage:
- If you have a hunch about a clinical stage biotechnology company, consider getting involved. However, do your research to find out if the company is on the verge of a public offering of common stock.
- Watch for the big news. This news often includes clinical data that shows promise in the company’s assets before asking for more money.
- On the day of the news, attempt to sell at the top. Even if you love what the company is doing, there’s no reason to stick around for the potential losses that could be seen due to an offering.
- Wait until an offering or for at least 5 trading session before getting back involved. If an offering takes place, and you truly believe in what the company is doing, holding off for the offering will give you an opportunity to buy in for the long run at a discount. Also, after big spikes, we don’t tend to see much more upward movement, at least not in the next 5 sessions that would be meaningful enough to risk an offering-related decline. So, wait a full week or until an offering takes place before investing in the company again.