At the small-cap end of the biotechnology space, reverse splits are more common than in practically any other area of the markets.
The necessity for a company to maintain a minimum bid price while repeatedly issuing stock to fund development pipelines, in conjunction with an inability to generate revenues while said company pushes an asset towards regulatory approval, can be a tough one to meet.
Technically, of course, a reverse split shouldn’t have any impact on shareholders – the portion of the company that their shares represent goes unchanged on paper. In reality, however, this is rarely the case.
Shorts line up ahead of a split and push the company down once it takes place, while sentiment surrounding the implications of a split for a company from an operational perspective (i.e. that the company mustn’t be doing that well if it needs to split to stay listed) can turn to the downside and compound any weakness.
If a company can regain compliance with a listing requirement organically, then – i.e. if it can boost its price above $1 for a couple of weeks – it removes the risk outlined above.
One company that we’ve looked at on a few occasions here at Insider Financial just managed to do exactly that – Cerecor Inc (NASDAQ:CERC).
On October 18, Cerecor announced that the NASDAQ has notified the company that it had regained compliance with the exchange’s listing requirements and – in doing so – has closed the issue surrounding thirty days below minimum bid at the start of this year.
What’s important here, and as outlined above, is that this has removed any near term risk of a reverse split. For this company, the potential of a split was hanging over sentiment and was drawing attention away from its pipeline.
Even the recent offloading of a development asset to Janssen, an offloading that validates the company’s drug development platform and that substantially strengthened the balance sheet (extending runway and removing any near term dilution risk) was overlooked by markets in favor for what a split might mean for market capitalization if and when it happened.
So what is happening operationally that could get this stock running now that the reverse split and dilution risks are removed from the equation?
Well, the company doesn’t have CERC-501 asset anymore as a result of the just-mentioned Janssen transaction. What it does have, however, and what now becomes its de facto lead development asset, is CERC-301.
This one failed a major depressive disorder (MDD) trial last year and was put on the backburner in favor of the 501 asset.
Going forward, however, Cerecor is going to see if the drug can be effective in orphan neurological disorders (things like rare forms of epilepsy, etc.) and – if it has any success in doing that – there’s some considerable potential for upside revaluation near term.
Just look at what’s happened with GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) over the last two years, or Marinus Pharmaceuticals Inc (NASDAQ:MRNS) during the last six months.
Epilepsy, and especially the rare forms of the condition, can be extremely lucrative for a biotechnology company that is able to get a drug on shelves in the US and all Cerecor s going to have to do over the next twelve months to get its stock running is to cobble together some early stage data that hints at the efficacy of 301 in one of these Orphan variations.
The risk here is that it’s not able to achieve this data generation, but given that the company is trading at about its cash balance right now, the risk is minimal and the company could be well worth a punt for anyone with a bit of risk tolerance.
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Disclosure: We have no position in CERC and have not been compensated for this article.