3 Small-Cap Biotech Stocks Crushing Shareholder Value With Stock Offerings

By Sean WilliamsFool.com

Source: U.S. Food and Drug Administration.

Biotechnology is among the most volatile sectors in the stock market. Because traditional fundamentals don't apply to a vast majority of biotech stocks -- a function of many of these companies still being in the developmental stage of their existence -- emotions and future projections go a long way toward determining stock valuations. That alone can create a recipe for above-average volatility.

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With cash needs high, small-cap biotech companies have few places to turn While a select handful of biotech stocks are self-sustaining (think blue-chip biotech companies such as Amgen), most are losing money and require capital to keep the lights on and the clinical trials running. Some companies are big enough to attract the attention of Big Pharma or biotech blue-chips and secure cash via licensing deals. Others are able to draw on a credit line or take out a loan with a financial institution. However, for many small-cap biotech stocks, pathways to capital can be limited -- so much so that issuing stock has become one of the most common ways small publicly-traded biotech companies will raise cash.

On one hand, selling common stock usually does get the job done. A company can get an immediate infusion of cash from a stock sale, and thus continue its day-to-day operations.

But, on the flipside, issuing more shares of stock is dilutive to the existing holders of that stock. Much more often than not, the pricing of a secondary share offering is below the closing price of a stock on the day the offering is announced. That's why stock offerings are typically referred to as "dilutive," and why most investors shun them, despite them being a necessary evil for cash-strapped companies.

These small-cap biotech stocks are crushing shareholders with dilution To be clear, stock offerings aren't solely for small-cap companies. Sometimes even the biggest companies in the world issue stock in order to fund a buyout. However, the pain that shareholders feel from a dilutive offering is readily apparent in small-cap stocks.

Here are three such small-cap biotech stocks that offer promising pipelines, but which have been absolutely crushing shareholder value via dilution.

Galena Biopharma Galena Biopharma may be working on a revolutionary cancer vaccine to prevent the recurrence of breast cancer as an adjuvant therapy, but it's also been responsible for crushing its shareholders' hopes and dreams with regular share offerings. In the fourth quarter of 2010, Galena Biopharma had 18.4 million shares of common stock outstanding. At the end of the second quarter of 2015, its outstanding share count had ballooned to 161.4 million shares.

Source: Galena BioPharma.

The good news is that there is hope for Galena and its shareholders, and its name is NeuVax. This aforementioned breast cancer vaccine helped reduce the risk of cancer recurrence by 78% over the placebo in a 60-month midstage trial. It's currently being studied in a phase 3 trial known as PRESENT that should yield interim data as early as Q4 of this year, or Q1 of 2016. The full results of the study aren't expected until sometime in 2018. If the interim results between now and 2018 impress a larger suitor, it's possible Galena could land a licensing partner and a bounty of upfront cash to go along with a deal.

Beyond NeuVax, Galena could struggle to reduce its cash outflow. Two acquired (and approved) therapies -- Abstral for breakthrough cancer pain, and Zuplenz for the treatment of chemotherapy-induced nausea and vomiting -- are expected to generate revenue growth in the years ahead, although post-launch sales of Abstral have been less than stellar. Until we get tangible efficacy data on NeuVax, it would appear that Galena's shareholders are at the mercy of the company's much-needed cash raises.

Peregrine Pharmaceuticals I swear that I'm not purposely trying to pick on cancer immunotherapies developers, but Peregrine Pharmaceuticals is another company guilty of compromising shareholder value by issuing shares of its common stock. By the end of 2010, Peregrine had nearly 51.9 million shares of common stock outstanding. As of September 4, 2015, Peregrine had more than 202.1 million shares outstanding.

Why such a huge increase in its outstanding share count? Simply put, Peregrine has burned through a lot of cash while attempting to develop its pipeline. Its accumulated deficit (basically an addition of all quarterly losses since inception) topped the $453 million mark in Q4 2015 (which ended April 30, 2015).

But, like Galena above, there's hope for Peregrine shareholders with experimental non-small cell lung cancer drug bavituximab. Peregrine is currently running a pivotal phase 3 study on bavituximab, known as SUNRISE, after the second-line NSCLC therapy led to a statistically significant improvement in overall survival of 4.4 months in a phase 2 study (11.7 months versus 7.3 months for the placebo). The release of top-line results from SUNRISE will all depend on the event timeline of the study, but data is widely expected in late 2016 or the first-quarter of 2017.

Source: Peregrine Pharmaceuticals.

Bavituximab's mechanism of action that removes the immunosuppressant quality of cancer cells makes it an intriguing licensing candidate for Big Pharma or large biotech companies eager to test it as a combo therapy, meaning cash-raising opportunities are available for Peregrine depending on bavituximab. Peregrine also has Avid Bioservices, its contract manufacturing subsidiary, which is growing at about a 20% clip on an annual basis. Overall, there is optimism here, but I wouldn't be surprised to see any strength in the stock cancelled out by Peregrine's dilutive history in the near-term.

CTI BioPharma I'd argue I saved the best (of the worst) for last. CTI BioPharma is a company focused on treating blood-borne cancers. It has one approved product, Pixuvri, which treats multiply relapsed aggressive B-cell non-Hodgkin lymphoma, and pacritinib, a late-stage drug hopeful that CTI is betting will make a difference for myelofibrosis patients. Myelofibrosis is a rare type of bone marrow cancer that leads to abnormal blood cell production and extensive bone marrow scarring.

Since the end of 2010, CTI BioPharma's outstanding common share count has jumped from 25.3 million to 175.5 million as of Q2 2015.

Source: Flickr user Mike Poresky.

Here's what's really scary about CTI BioPharma, and why I'd strongly caution investors before considering an investment in this company: CTI has generated a meager $3.8 million in total revenue through the first-half of 2015, with Pixuvri accounting for $1.7 million. In the meantime, CTI's losses just continue to grow. Despite not having included its accumulated deficit figure on its earnings reports for some years now, some backtracking and addition on my part led to the conclusion that CTI's accumulated losses since inception surpassed the $2 billion mark in Q2 2015. Allow me to repeat that: CTI BioPharma has lost 2 billion dollars since it was founded.

This isn't to say that Pixuvri or pacritinib couldn't surprise people and help save lives, but CTI BioPharma has been an absolute destructor of shareholder value via its losses and stock offerings. With its stock down 99.95% over the last decade, CTI BioPharma is the poster child for the dangers of stock dilution.

The article 3 Small-Cap Biotech Stocks Crushing Shareholder Value With Stock Offerings originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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