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There are only two primary paths that a development stage drugmaker with no recurring revenue can take to raise cash. It can either give up an ownership interest in one or more of its drugs in development, or it can give up an ownership interest in itself.
Vertex Pharmaceuticals (Nasdaq: VRTX ) went down that second path. It announced Monday that it had completed a stock offering that will provide an additional $220 million in cash, before fees. In exchange, current shareholders will be diluted by about another 6% to 7%.
This share offering is Vertex’s third selling of common stock since the start of 2006. All told, Vertex has raised a total of at least $926 million in gross proceeds from dilutive stock and convertible note offerings as it and partner Johnson and Johnson (NYSE: JNJ ) try to develop the first truly novel hepatitis C treatment to come to the market since 2001 and 2002. Back then, Roche and Schering-Plough (NYSE: SGP ) developed new versions of their hepatitis C interferon treatments.
So what does this latest stock-offering mean for Vertex shareholders? Vertex was guiding for its 2008 net loss to be around $400 million, excluding certain charges. As things stand right now, Vertex isn’t giving any hint that telaprevir could be on the market before 2011, after its phase 3 studies are completed. Therefore, with only $832 million in cash and equivalents on its balance sheet at the end of June, it was going to need to raise some cash at some point in the future before telaprevir may be approved for marketing.
While no investor likes seeing their ownership interest in a company diluted, issuing new shares is almost the only way open for this type of company to raise cash. In several cases we’ve seen this year, like Theravance (Nasdaq: THRX ) and Exelixis (Nasdaq: EXEL ) , who were both in similar situations, the proverbial bird in the hand is sometimes worth two in the bush. Their stock prices have fallen dramatically later in the year for reasons unrelated to their stock offerings.
The bottom line for this analyst is that with so much uncertainty swirling around the economy and the stock market, it makes sense for Vertex to build its cash reserves now rather than risk having to do so later at potentially worse terms in these tumultuous times.