Shares of Tonix Pharmaceuticals (TNXP -0.10%) have been highly volatile since the company entered the race to develop a new COVID-19 vaccine. Investors saw this biotech stock double in February, only to give back much of those gains.
When the company reported results for the first three months of 2021, investors got an earful about potential new drugs and diagnostic tools in development. With lots to look forward to, it's easy to miss signs that could signal trouble ahead.
In the first quarter of 2021, Tonix Pharmaceuticals reported research and development costs that more than tripled. Since it could be a long time before this company has any reliable revenue streams, careful management of limited resources today will have a huge impact on shareholder returns over the long run.
Unfortunately for its long-term shareholders, careful management of capital isn't in this company's vocabulary. The ballooning use of equity to fund a sprawling operation was the clearest warning in the company's first-quarter earnings report.
What's the focus?
About a year and a half ago, Tonix Pharmaceuticals' lead candidate, TNX-102, was in a pivotal trial designed to support a new drug application for the treatment of post-traumatic stress disorder (PTSD). Instead of focusing on the PTSD indication, the company invested in another large pivotal study with TNX-102 as a treatment for fibromyalgia patients.
Last December, we learned TNX-102 failed to produce a measurable improvement for PTSD patients, but we also saw a sublingual version of TNX-102 significantly reduce pain for fibromyalgia patients. Instead of turning all of its attention to focus on fibromyalgia, though, the company has been trying to turn its investors' attention toward potential new vaccines, diagnostics, and therapies to address the COVID-19 pandemic.
A potential COVID-19 vaccine the company started developing last February, called TNX-1800, produced positive results in a non-human primate study last November. When the company reported first-quarter earnings on Monday, May 11, 2021, the company still hadn't submitted an investigational new drug (IND) application to the FDA. That's disturbing because the FDA needs to approve an IND before the company can begin testing TNX-1800 on people willing to enroll in a vaccine study, a population getting harder to find by the minute.
Instead of pushing its vaccine candidate forward at top speed, Tonix Pharmaceuticals expanded its COVID-19 pipeline this year to include a new skin-based diagnostic in January. More recently, the company in-licensed an unapproved broad-spectrum antiviral called sangivamycin with the intent to test it as a new COVID-19 treatment.
Who's paying for all this?
Tonix Pharmaceuticals' disregard for shareholders shows itself in one terrifying figure the company has to report each quarter. The company's share count ballooned to 324 million in the first quarter of 2021 from 49 million just one year ago. This level of dilution means investors who bought the stock over a year ago are unlikely to realize a positive return on their investment, even if one of the company's new ventures succeeds.
Investors who bought shares of Tonix Pharmaceuticals three years ago have seen the company's market cap rise a whopping 1,300%, but they're still sitting on heavy losses they'll never recover. That's because the company's been using shares of its own stock like Monopoly money to begin a bunch of high-profile ventures with little chance of panning out. Over the past three years, Tonix Pharmaceuticals' outstanding share count exploded around 385,800% higher.
There's nothing unusual about seeing clinical-stage biotechs use equity to fund their operations, but the practice shouldn't devastate long-term shareholders. Any time you see a drugmaker with both lips glued to the equity tap, you should immediately begin looking for better options before even trying to evaluate its pipeline's chances of success.