Biotech Stock Mailbag: Rexahn, Vertex, Peregrine, Sarepta

BOSTON (TheStreet) -- Here's the last Biotech Stock Mailbag of the summer.

BuggyFunBunny writes: "A couple for the Mailbag, should you feel like it. 1) It seems that ATM/stealth financing/dilution is more common recently than in the past. What meaning should we assess? 2) Just saw that a past whipping boy has announced 'good' data: Rexahn Pharmaceuticals (RNN). What meaning should we assess this?"

U.S. companies raised $2.3 billion via 140 At-The-Market (ATM) offerings in the first quarter of the year -- a record amount and a 6% increase over the first quarter 2011, according to statistics gathered by Brinson Patrick, a boutique investment bank that specializes in facilitating ATM transactions.

ATM financing arrangements allow companies, through a broker or investment bank, to sell treasury stock to investors at current market prices. Small companies like ATMs because it's a relatively easy and cheap way to raise cash -- less expensive than a traditional follow-on stock offering managed by a traditional Wall Street investment bank. Companies also have more control over how they sell stock and raise cash through an ATM because the offering can be turned "on" or "off" as market conditions change.

Small-cap and development-stage biotech companies have definitely embraced ATMs as a preferred financing vehicle. Acadia Pharmaceuticals (ACAD), Aeterna Zentaris (AEZS), Peregrine Pharmaceuticals (PPHM), Somaxon Pharma (SOMX) and Biocryst Pharma (BCRX) are just a small sampling of recent ATM sellers.

While I generally agree that ATMs are advantageous for smallish biotech firms, the growing popularity of this financing vehicle is not necessarily a welcome trend for investors. Companies are under no obligation to disclose the sale of stock through ATMs except in customary regulatory filings at the end of each quarter or fiscal year. In many cases, this leads to stealth dilution.

The most egregious example I've come across recently was Peregrine, which diluted shareholders by 41% in the most recent fiscal year. A large majority of the 31 million (!!) shares sold by Peregrine were through an opaque ATM facility. Shareholders had no idea Peregrine was selling all this stock unless they read through SEC filings -- something every investor should do but few get around to.

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