Shares of ImmunoGen (NASDAQ: IMGN) closed down 10.6% on Tuesday after the company disclosed that it exchanged some of its 4.5% convertible senior notes due in 2021 for newly issued shares.
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The biotech exchanged $15.1 million of the $84.9 million in outstanding notes in exchange for 22,604,196 shares. If the company had waited until the notes matured, it would have been able to give the note holders 2,331,986 fewer shares, but the premium exchange rate allows ImmunoGen to avoid the interest due on the notes in the meantime.
For ImmunoGen, cash is king right now. The biotech has raised cash by partnering some assets, as well as trading future royalties for up-front cash from current partners, so a move such as the one in question shouldn't come as much of a surprise.
The newly issued shares dilute current shareholders, increasing the share count to 112,220,570 shares. Should ImmunoGen become profitable, the earnings per share will be hurt by the higher share count. But, of course, if ImmunoGen doesn't have the cash to develop its lead drug and eventually become profitable, having a lower share count is of no value.
Long-term investors should be focused on ImmuoGen's Forward I phase 3 trial, testing mirvetuximab soravtansine in patients with ovarian cancer. The note conversion helps the company conserve its cash to pay for the trial, and while shareholders own a smaller piece of the pie after the dilution, the pie will be much larger if Forward I can show mirvetuximab soravtansine slows progression of the cancer.
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