Retail investors often see stock splits as good news, as these shares become more affordable post-split. Not surprisingly, the announcement usually is accompanied by an immediate rally in the stock price. Reverse stock splits, however, have the opposite connotation, as companies usually deploy those moves to stay listed on exchanges that usually have minimum listing prices. When their share prices fall below the stipulated threshold, management opts for a reverse split. And usually, there's good reason the stock is at such a low price -- the business isn't doing well.
Meme stock Mind Medicine (MNMD 0.71%) recently conducted a reverse stock split. It has lost more than 70% of its value over the past year (the S&P 500 is down just 13% during this period) and consolidating its shares will ensure its continued listing on the Nasdaq Stock Market for the time being.
Mind Medicine completes 1-for-15 reverse stock split
Last month, Mind Medicine consolidated its shares on a 1-for-15 basis. It accomplished its goal of getting the stock to up over a $1 in order to satisfy the Nasdaq's minimum bid price requirement. Last week, the psychedelics stock was trading at more than $11; it would need to crash more than 90% from where it is now for it to breach the $1 price point again.
The significant reverse stock split should give Mind Medicine's stock plenty of breathing room for the time being. While stock splits don't technically matter as investors' positions remain unchanged, a reverse split isn't good news and can serve as a reminder that the company hasn't been doing well.
Why has Mind Medicine struggled?
All it takes is a quick look at the company's financial statements to see why Mind Medicine hasn't been performing well. The business generates no revenue and its losses over the trailing 12 months come in at just under $70 million. During that time it has also burned through $53 million in cash from its operations, which is about half of the $106 million it reported in cash and cash equivalents as of the end of June.
The company's focus on psychedelic drugs makes it a risky investment by its very nature given the federal ban on psychedelics. Mind Medicine's treatments are in phase 2 trials, and even under a best-case scenario, it could be years before they start generating any revenue. They include treatments for generalized anxiety disorder, opioid withdrawal, cluster headaches, and major depression.
The market for antidepressant drugs alone will be worth $21 billion in 2030, according to estimates from Allied Market Research. It's growing at a compound annual rate of 3%. Even just gaining a bit of that market share could lead to a huge payday for Mind Medicine.
Is Mind Medicine too risky of a buy?
Mind Medicine's business is an incredibly risky one to invest in. Without any approved products to rely on, the company is only going to continue accumulating losses. Meanwhile, obtaining approval from the Food and Drug Administration for a psychedelic-based drug may be a long shot. Investors should probably consider the cannabis industry, which is much more mainstream than psychedelics from an investing perspective. Even then, there is still just one cannabis-based medicine that the FDA has approved thus far (Epidiolex).
It could be a very long time for an investment in Mind Medicine to pay off. And along the way, the stock is likely to continue declining due to the inevitable dilution that's likely to happen during that time. Investors might give up some gains, but the safer approach would be to wait until the company's prospects for generating revenue improve. At this stage, Mind Medicine looks like too much of a long shot to invest in.
