On the surface, Aeterna Zentaris' (NASDAQ:AEZS) reverse split last week is a good thing for current investors. Or rather... the lack of a reverse stock split would be worse.

The Nasdaq stock exchange requires stocks to trade above $1.00 per share and can kick off a company that can't maintain that level. Getting sent to the over-the-counter bulletin boards is bad for investors because the volume is generally much lower, increasing bid-ask spreads, which makes it hard to get a good sell price. It also makes it much harder for companies to raise capital, which is bad news for a company that isn't profitable yet.

After the 6-for-1 reverse split, Aeterna Zentaris is trading around $3.00, well above the kick-off threshold. The biotech isn't out of the woods yet -- there are plenty of biotechs that have undergone a reverse split, just to see their stock slip again and have to do another one:

Company

Number of Reverse Stock Splits

Closing Price, Oct. 5, 2012

Split-Adjusted Price After First Split

Cell Therapeutics (NASDAQ:CTIC)

4

$1.53

$1,783.21

BioSante Pharmaceuticals (NASDAQ:ANIP)

2

$1.50

$24.00

Cyclacel Pharmaceuticals (NASDAQ:CYCC)

2

$5.33

$55.93

Discovery Laboratories

 (NASDAQ:DSCO)

2

$3.05

$93.75

Source: Yahoo! Finance.

That isn't to say that the company is doomed for failure. Spectrum Pharmaceuticals (NASDAQ:SPPI) and Amarin (NASDAQ:AMRN) trade higher than they did after their reverse stock splits. Getting a drug approved will do that. 

And biotech's newest darling, Sarepta Therapeutics (NASDAQ:SRPT), just did a 1:6 reverse stock split in July to get compliant with the Nasdaq, only to see its stock jump above $30 per share after releasing solid phase 2 data last week.

Only time will tell which camp with Aeterna Zentaris fall into. AEZS-130, its adult human-growth-hormone deficiency diagnostic, looks like it'll get approved, but isn't likely to be a big seller. The compound is also being tested as a therapeutic for weight loss in patients on chemotherapy, but it's still in the early stages there. Perifosine, which failed in colorectal cancer, is still being tested in multiple myeloma, which is high risk -- and high reward -- to say the least. Its best bet at a turnaround is likely AEZS-108, its endometrial cancer drug, which will hopefully enter phase 3 development soon.

All those trials cost money; don't be surprised to see Aeterna Zentaris raise capital at its newly inflated stock price. All but the most risk-tolerant investors would be better off waiting for a turnaround before investing.

 

Fool contributor Brian Orelli has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.