The Dilutive Shadow of AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO)

[[tagnumber 0]][[tagnumber 1]]Yesterday, AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) closed trade at $2.28 per share, down 6.5% from its previous close on Friday. With slightly more than 3 million shares changing hands, it was by far not the most active session for AVEO as the 30–day average trading volume of the stock is twice as high.[[tagnumber 2]] [[tagnumber 0]]AVEO Pharmaceuticals has been trying to find the ultimate medicine for cancer since inception fourteen years ago. Now, it has a few product candidates in various stages of clinical development, yet it still has a long way to go before the FDA gives the green light.[[tagnumber 2]] [[tagnumber 5]]Long years of continual work in progress has always been a distinguishing characteristic of businesses trying to break through in the health care industry. That is why, AVEO‘s accumulated deficit of approximately $0.5 Billion may not take everyone by surprise. Rather, this number is likely to grow higher in the forthcoming quarters and AVEO‘s recently announced intention to sell a combination of securities is indicative of its future capital needs. Having been brought into effect by the SEC on May 28, the company‘s prospectus allows for the sale of common stock, preferred stock, debt securities, and warrants in tranches and at prices to be determined at the time of each sale. As a final result of the placement, AVEO‘s new BoD expects to raise $100 million to make sure its clinical trials can proceed amicably.[[tagnumber 6]][[tagnumber 2]] [[tagnumber 0]]And there is nothing wrong with raising external capital this way. The thing is, a business could not do this exercise over and over again unless an increase in the number of authorized stock occurs at some point. This is exactly what happened two days after the SEC confirmed AVEO‘s S–3 form. A new 8–K outlined, among other things, the change in A/S from 100 million to 200 million effective immediately. Prior to this amendment, AVEO only had some 45 million common shares in reserve that have not yet been issued. Considering that [[tagnumber 9]]a)[[tagnumber 10]] AVEO‘s 52–week average price stands at $2 per share and [[tagnumber 9]]b)[[tagnumber 10]] the company will need a certain amount of free stock for its annual cash incentive award program, these 45 million authorized shares at hand would obviously not be sufficient to both cover these needs and raise $100 million at the same time.[[tagnumber 2]] [[tagnumber 0]]That is why, AVEO‘s move towards a bigger stock vault is a logical step. As much as it seems good for the company, however, it is not that favorable to current stockholders. Before the amendment, they were facing a dilutive risk which could potentially halve their stakes. Now the stakes could reduce by a factor of four if AVEO‘s management were to deploy all of the newly created authorized shares.[[tagnumber 2]] [[tagnumber 0]]Until AVEO Pharmaceuticals comes up with a product ready to hit the market and start generating cash flows, the shadow of dilution will accompany both current and prospective stockholders.[[tagnumber 2]] [[tagnumber 0]]Roughly one hour into today‘s session, AVEO shares are sliding below $2.20, down 5% from their Jun. 8 close value.[[tagnumber 2]]