Last Thursday, RigelPharmaceuticals (NASDAQ:RIGL) plummeted more than 60% from the previous day's close after it announced that phase 2 trials for its drug R112, targeted to relive nasal allergy symptoms, did not show a statistically significant difference from placebos. Given its minuscule $2 million debt and $127.9 million in cash, is Rigel really that bad off?
With $5.50 a share in cash, and a $7.50 share price, the stock looks cash-rich. Don't be fooled. It takes years to get drugs through clinical testing and hundreds of millions of dollars to get a product to market. In fact, the company announced a $200 million shelf offering three weeks ago. Judging from that, the company is hardly rolling in greenbacks.
Development costs are so high that Rigel has found partners like Pfizer (NYSE:PFE), Novartis (NYSE:NVS), and Merck (NYSE:MRK) to help share the burden. But when your lead drug candidate doesn't beat placebo, and your next candidate in line just completed phase 1 testing, you're left with nothing on the short-term horizon to entice investors to buy your stock. Even after Thursday's horrific 60.7% fall from the previous day's close, Rigel fell another 7% the following day, setting a new 52-week low.
The deflated stock price may be a financial anchor for the company. Trying to raise $200 million by selling shares would greatly dilute the share base. Borrowing money would create interest payments without any clear product revenue on the horizon. Getting bigger payments from partners, if that's even possible, would also require giving them a bigger cut of any future profits.
For now, Rigel will live off its cash and focus on small-molecule compounds, with the goal of commencing clinical trials with one new lead compound every year. There may be a winner in the current mix, or one on the way. But until another compound begins to offer glimmers of hope, this stock will probably offer little if any price appreciation.
Merck is a Motley Fool Income Investor recommendation. Pfizer is a Motley Fool Inside Value selection.
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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see the Motley Fool's disclosure policy.
