Shares Rocked by Inovio News
Shares of Inovio Pharmaceuticals Inc (NASDAQ:INO) took a beating this week after news broke of an imminent stock offering. Investors dragged the shares down 24% in just two trading sessions, putting the Inovio stock price at $6.01.
I understand the concern.
Imagine if someone you knew—a smart, well credentialed, seemingly put-together person—asked you for money to start a business. After a little due diligence, you might agree to invest some money. Who knows, right? Maybe you’ll make some money out of it…
But then the person comes back a year later, having made no apparent progress and asking for more money. What do you do?
That is basically what Inovio Pharmaceuticals stock is doing at the moment.
The clinical drug maker has failed to produce a useful drug thus far, yet it wants to raise $86.25 million in common equity. In other words, it is asking for more money without showing any progress.
Investors are not taking it too kindly.
Chart courtesy of StockCharts.com
The market reaction has been vicious, particularly because of the last few weeks. There were moments of volatility that shook investor confidence. The moments passed quickly, though, and we soon returned to our period of blissful ignorance.
However, investors are not yet settled over the fate of Inovio stock. Around the same time the price tanked, analysts at Aegis Capital Corporation issued (and reissued) a “Buy” rating on the stock.
Also Read: One Best Biotech Stock Play for 2017
They tagged a $14.00 price target on the stock, suggesting it has enormous room to the upside.
Can Inovio Stock Rebound to $14?
The Aegis rating wouldn’t be a big deal if it were isolated.
But Zacks Investment Research upgraded INO stock from “Sell” to “Hold” around the same time; Stifel Financial Corp (NYSE:SF) reiterated a “Buy” rating in an April 25 note to investors; BNP Paribas SA (EPA:BNP) remained unaffected at “Neutral”; and H.C. Wainwright & Co., LLC turned bullish on the company.
Heck, Jefferies LLC issued a $38.00 price target on Inovio stock price.
In other words, there weren’t a lot of negative reactions to the new financing round. Analysts seemed either indifferent or positive about the Inovio news.
I found this really interesting. Why is there such a wide gap between the market reaction and the analyst reaction? Do these analysts see something we don’t?
It’s possible that some of them find Inovio’s new drug promising. Perhaps they believe it could drive the INO stock price to $14.00. I’m not entirely sure. There is certainly room to believe that INO stock could follow the hockey-stick trajectory of other biotech stocks.
You see, the business of pharmaceuticals is very different from most other industries. It’s not hard to find an emerging tech company with fast-growing revenues and nearly as fast-growing losses. Red ink isn’t a disqualifier in the Bay Area. But even in Silicon Valley, you’d be hard pressed to find a (successful) company with no revenues.
Biotech is a whole other ball game. These companies can raise money…one…two…THREE times before going public, and never, not once, show much in the way of revenues. They are not expected to do so until the Federal Drug Administration (FDA) approves their new drug.
At that point, the metric changes from regulatory hurdles to revenue.
Perhaps Inovio is raising money for a final push to clear FDA regulations. Maybe that’s what these analysts are seeing. But to be honest, I don’t know where they are getting that impression from, because Inovio’s statement don’t really say whether FDA approval is imminent.
It simply states that:
“Inovio anticipates using the net proceeds from this offering for general corporate purposes, including clinical trial expenses, research and development expenses, general and administrative expenses, manufacturing expenses and other business development activities.”
(Source: “Inovio Announces Proposed Public Offering of Common Stock,” Inovio Pharmaceuticals Inc, July 18, 2017.)
For those of you that don’t speak legalese, allow me to translate:
We don’t want you to know what we’re using the money for, so we wrote down everything we could possibly spend it on.
This is the exact opposite of what the company would do if it were trying to communicate a final heave-ho across the regulatory hurdle. As such, I remain doubtful about the Inovio stock price.