Taking into account the firm’s premium pipeline and recent trial results, the secondary offering may be the catalyst required to enhance the firm’s value.
Positive FCD105 Phase 2 Trial Results
On June 2nd, Menlo Therapeutics (NASDAQ: $MNLO) announced positive results for its FCD105 product. The product demonstrated statistically significant and highly satisfactory improvements of the underlying condition at Week 12.
The firm is expected to meet with FDA officials in last quarter of 2020, in an End-of-Phase-2 meeting. Menlo Therapeutics will present the clinical trial results and proposition for a Phase 3 development program.
Secondary Offering of Common Stock
On June 4th, Menlo Therapeutics announced a proposed offering of common stock. The firm intends to offer and sell, subject to market conditions, shares of its common stock in an underwritten public offering. The firm will allow underwriters a 30-day option to purchase up to an additional 15% of common shares, offered within the issue.
On June 5th, the firm announced the details regarding the issue size and closure date. Menlo Therapeutics will issue 27,050,000 shares for $1.85 per share. With underwriting discounts and commissions totaling $0.111 and expenses payable for the issue, the firm expects to raise net proceeds of $46,600,000 (or $53,600,000 if underwriters exercise their option to purchase additional shares in full). The issuance closes June 9th.
The firm will have a total of 163,095,543 shares outstanding after this issue.
For investors this translates to 16.56% dilution in enterprise value and a theoretical dilution price of $2.02 per share with respect to June 5th’s closing price of $2.06.
Cowen and Piper Sandler & Co. will be acting as joint book-runners for the issue. While LifeSci Capital LLC will act as the lead manager.
Major risk factors with this issue include:
- Huge market sell off which will depress share prices following the offering
- Inappropriate allocation of funds from the issue
- Increased volatility of share prices
Menlo Therapeutics is expected to use the capital proceeds from this issue for:
- Phase III clinical trials for FCD105
- Supporting the commercial launch of Zilxi
- Continued development of product candidates
- Remainder, if any, will be allocated to general corporate purposes
According to the firm’s latest SEC filing, they also plan on acquiring shareholder approval for a reverse stock split at a later date.
This will reduce the number of shares outstanding in an effort to appropriately reflect their market cap. Additionally, the reverse stock split will provide a safe distance from the sub $1.00 delistment range.
Moreover, depending on the ratio of the reverse stock split, this may propel the share price into the double digits which will garner more institutional interest, further appreciating the share price.
- As a result of the news, shares slipped in after-hours by 14.03% to $1.90 from a closing price of $2.13 on June 4th.
- Furthermore, on June 5th shares depreciated further by 6.79%, finishing the day at $2.06.
- Considering the $1.85 issuance price, the market’s reaction and in maintaining a price level above $2.00 could be seen as indicative of a positive sentiment seeing past the issue of dilution.
- The news of a possible second offering may also have been why shares had not appreciated following FDA approval of Zilxi and the success of Phase 2 FCD105 trials.
- Furthermore, recent reduction in Menlo’ positions from ETFs and mutual funds may have added to the depressed prices observed in the previous week.
- We may see residual gains from these events after the issuance has closed.
Secondary offerings are not inherently good or bad.
Menlo Therapeutics has recently launched two FDA-approved commercial products (Amzeeq and Zilxi) and has announced positive results for its FCD105 product, which is expected to be the firm’s greatest revenue driver.
One of Menlo Therapeutics largest institutional shareholders is Perceptive Advisors Llc. headed by Joe Edelman, who is renowned for his ability to produce above market returns with Biotechnology picks.
Menlo Therapeutics successful Phase 2 trials for FCD105 and an already established pipeline, positions the firm for growth in the long term.
The firm’s announcement of a secondary offering of common stock may prove strategic and may enhance investor value in the long run.
Read more about why Menlo Therapeutics (NASDAQ: $MNLO) should be on your radar.