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Why Foamix Stock Just Dropped 27.5%

By Rich Smith - Nov 11, 2019 at 10:55AM

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Investors take a close look at Foamix's new acquisition -- and don't like what they see.

What happened

Shares of Foamix Pharmaceuticals ( FOMX ) stock crashed in early trading Monday after the Israeli dermatological treatment company announced an agreement to acquire the competing, revenue-less pharmaceutical products business Menlo Therapeutics ( MNLO ) in an all-stock transaction.

Shares of Foamix are down 27.5% as of 10:40 a.m. EST in response to the news, and Menlo's not looking too healthy itself -- down 8.4%.

Woman with her hair wrapped in a towel examines her face in mirror.

Image source: Getty Images.

So what

So what has investors so upset about this deal?

According to the companies' joint press release, Foamix wants to join its just-approved Amzeeq drug for acne treatment and its soon-to-be-approved (they hope) FMX103 drug for treating rosacea with Menlo's late-stage itch treatment serlopitant, which is currently undergoing two phase 3 clinical trials with the FDA. If all goes well, the result will be an up-and-coming company in the dermatology space with not two but three drugs on the market for treating various related skin conditions.

So far, so good.

Now what

Now, the details of the merger call for Foamix shareholders to receive 0.5924 shares of Menlo stock for each share of Foamix they currently own. At the valuation when the deal was announced, that worked out to an 18% premium for Menlo stockholders, said Foamix. With Foamix stock down so much today, however, that premium has already more or less evaporated.

Furthermore, as a sort of insurance in case Menlo's products don't get approved by the FDA, Foamix will receive an additional 0.6815 share of Menlo for each Foamix share turned in if Menlo's product fails one FDA trial -- and an additional 1.2082 shares of Menlo if the latter fails both its FDA clinical trials.

On the one hand, this seems like a prudent precaution to take. On the other, it might serve to highlight the risk Foamix is taking on in joining its business -- with an FDA-approved drug in hand -- to another business which doesn't have that approval. That added risk, I suspect, is the reason investors are lowering their bids for Foamix stock today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Foamix Pharmaceuticals Ltd. Stock Quote
Foamix Pharmaceuticals Ltd.
FOMX
Menlo Therapeutics Inc. Stock Quote
Menlo Therapeutics Inc.
MNLO

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