How Mighty Is Isis?

Expect Dilution

It's no secret that Isis will need to raise money in the future. Crooke believes "it's factored in by knowledgeable people who invest in biotech companies."

Isis has a $200 million shelf offering on file with the Securities and Exchange Commission, meaning it can offer up to $200 million of common stock in the future. At Monday's closing price, that would add about 16 million shares. Of course, there's no guarantee Isis will use the entire $200 million or that it would take place at current prices -- but it's more than likely the company will tap that source eventually.

Isis has already secured funding from several groups that will lead to dilutive events. In May, Azimuth Opportunity Ltd. committed to buying $75 million worth of stock or 14.5 million shares, whichever is reached first, by December 2007. To date, Azimuth has spent $20 million on 2.7 million shares. At Monday's closing price, the agreement would dilute the shares by another 4.4 million by this time next year.

The company also created a special financing instrument with Symphony Capital Partners in April. Symphony invested $75 million to create Symphony GenIsis for the purpose of funding ISIS 301012 through phase IIb trials in patients with high cholesterol and two diabetes drugs. The funds in Symphony GenIsis are reflected on Isis' balance sheet as part of cash.

As a result, Symphony GenIsis owns the intellectual-property rights to the drugs. If Isis wants the rights back, it must to pay Symphony $195 million within four years, a compounded annual growth rate of 27%. One third of that figure can come in the form of stock. Symphony was also granted five-year warrants on 4.25 million shares at $8.93 a share. That's expensive cash. It makes me wonder why Isis couldn't find a cheaper source of funds.

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In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.