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Biotech's Hottest Trend -- Dilution

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You would think October was National Dilution Month, the way small-cap biotech keeps hitting up shareholders for cash. Today we have four more companies dipping their toes in the equity offering waters.

Three companies after-hours announced dilutive offerings but didn't disclose the amount. ImmunoCellular Therapeutics (NYSEMKT: IMUC  ) , which was down more than 2% during the day, is selling off substantially post-close, dropping 16%. MannKind (Nasdaq: MNKD  ) is faring slightly better, falling 6% after hours, as is Lexicon Pharmaceuticals (Nasdaq: LXRX  ) .

With excitement around Lexicon's starting of a phase 3 trial for orphan drug telotristat etiprate in carcinoid syndrome after solid phase 2 data, the dilution isn't totally surprising. MannKind, however, remains stuck in FDA purgatory, burning cash while awaiting conclusion of a required trial testing its Dreamboat inhaler with its drug Afrezza before it can resubmit for approval. ImmunoCellular is advancing a brain cancer vaccine through midstage trials, with results due out early next year.

On the other side of the coin is Peregrine (Nasdaq: PPHM  ) , which used an at-the-market offering (ATM) to raise gross proceeds to pay down debt. ATM transactions are an industry favorite, since they don't have to disclose right away when they do it. For instance, Hemispherx (NYSEMKT: HEB  ) just executed a $9.5 million ATM last week in advance of chronic fatigue syndrome drug Ampligen's new bout with the FDA.

In Peregrine's case, the average sale price was $0.93, a far cry from the $5.39 shares were trading at when investors trusted the bavituximab results, but substantially higher than the $0.70 they closed at yesterday, explaining the 24% pop today. The financing will allow Peregrine to keep the lights on while advancing bavituximab until the third quarter of 2013. The hope is that good trial results in the interim and a much higher share price will comfort investors when dilution comes knocking again.

Even though dilution is a way of life for development-stage biotechs, investors are still attracted to industry by the allure of substantial short-term gains. But there is a better approach to building long-term wealth and retiring well. In our free report "3 Stocks That Will Help You Retire Rich," we reveal some stocks that could help you as well as some winning wealth-building strategies. Click here to keep reading.

David Williamson and The Motley Fool have no positions in the stocks mentioned above. Click here to see Dave's holdings and a short bio. Motley Fool newsletter services recommend MannKind. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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10/21/2016 10:27 AM
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