ContraFect Corp (NASDAQ:CFRX) Loses Ground On New Stock Offering
Scarcely an hour has passed since market open and the stock of ContraFect Corp (NASDAQ:CFRX) is already lining up with the biggest losers on the intra-day charts. As we write this, CFRX is down 15% from its latest close after the biotech revealed what appears to be the first tranche of an up to one-hundred-million-dollar impending public offering of common stock and warrants. The latter surfaced in an S-3 Shelf Registration Statement which was filed with the SEC on June 1, 2016.
According to what management has already planned out, the this first batch will tentatively generate $35 million in gross proceeds by the time the company completes it, reportedly some time next week. Over the next few business days, ContraFect’s managers expect to sell 14 million stock units at a price of $2.50 per unit. Each unit contains one share of common CFRX stock and a warrant to purchase an additional common share at an exercise price of $3.00 per share. Considering that CFRX shares are currently quoted in close proximity to the publicly announced unit purchase price of $2.50, those who intend to acquire CFRX units in the coming days might strike a bargain. Is such a bargain guaranteed, though?
Not necessarily. Suppose you were to purchase a unit at $2.50 and spend another $3.00 to convert your warrant into an additional share of stock right away. You’d get two shares of common CFRX stock for a total of $5.50, or an average $2.75 per share. Because of the public offering announcement, however, CFRX has already lost 1/6 of its market value well before noon, which means the negative momentum might as well continue till market close. Why? In general, stocks tend to go down after announcing a public stock offering as current stockholders back away for fear of dilution.
Needless to say, there is a real prospect that dilution is not only inevitable, but also just a few days away. By next Wednesday, ContraFect’s outstanding stock of 27 million shares will surge by at least 14 million, provided that unit holders refrain from converting their warrants until the current market price goes above the $3.00 threshold. And if it does cross that mark eventually, we may witness a two-fold cumulative increase on CFRX‘s O/S, or 100% dilution derived just from just a third of the total units ContraFect’s managers hope to place.
Yet, this is a classic form of equity financing. For a clinical-stage biotech whose two leading drug candidates have yet to reach Phase 2 of their respective trials, this will hardly be the last time management has to take dilutive measures in order to provide fresh capital to keep clinical studies going. To keep investors interested, however, these studies will have to generate positive developments at every single step.