Investors could see it coming from a mile away, but preparation doesn't quite relieve the sting of dilution.
Fresh off the controversial approval for its Lou Gehrig's disease treatment, which was partially funded by the social media-driven Ice Bucket Challenge years ago, Amylyx Pharmaceuticals (AMLX) announced a public offering of common stock. The pricing wasn't set as of this writing, but the drug developer intends to offer up to 6.9 million shares of common stock.
The offering will dilute existing shareholders by about 12%. Near current prices, the offering could raise between $170 million to $210 million in gross proceeds. That's enough to nearly double the company's cash balance from the end of June 2022 and help support the launch of Relyvrio.
Although dilution is never painless, this is a good example of a stock offering done the right way. Let's walk through the when and why of stock offerings for drug developers.
Drug Development and Stock Dilution Go Hand In Hand
Drug development is expensive. It costs hundreds of millions of dollars to successfully fund preclinical and clinical development of an experimental treatment. If investors include failed drug candidates in the cost calculation, then drug developers spend over $1 billion total on R&D for each product that eventually earns FDA approval.
Unlike software companies that can at least partially fund growth investments with revenue and cash flows, biotech companies don't have that luxury. Companies such as Amylyx Pharmaceuticals must thread together a combination of research grants, licensing deals, and stock offerings to fund operations over the multi-year period required to bring a single drug candidate before regulators. Stock offerings are the most common – and most painful – funding mechanism.
What doesn't get nearly as much discussion is what happens after a drug earns FDA approval. Although the regulatory decision is treated as the final bookend of drug development, it marks only the first step in a drug product's commercial life.
Drug developers almost always see operating losses increase in the first two or three years following their first FDA approval. That's because a company often must build commercial infrastructure – sales teams, marketing teams, contracts for long-term manufacturing, and so on – for the first time. It's really expensive.
Prepare for a Big Increase in Cash Burn
There are a lot of moving parts to evaluating Amylyx Pharmaceuticals.
First, there's the controversial approval of Relyvrio for amyotrophic lateral sclerosis (ALS). The FDA approved the drug before a confirmatory phase 3 clinical trial was conducted. Instead, regulators used data from a phase 2 study that showed the drug candidate may help patients live longer, but only if a few creative statistical methods and extrapolations are used. Many scientists and doctors (including some at the FDA) were critical of the data and the approval decision. Relyvrio could be pulled from the market if a phase 3 clinical trial fails to deliver a clear benefit.
Second, there's the company's financial position. Amylyx Pharmaceuticals ended June 2022 with $206 million in cash. That provided a relatively short cash runway considering the business reported cash burn from operations of $87 million in the first half of this year.
Third, the accelerated approval might have been cheered by markets, but it creates unique funding challenges. Amylyx Pharmaceuticals must conduct a large, expensive phase 3 clinical trial while simultaneously building commercial infrastructure for the first time. That's a double whammy of expenses.
The good news is Amylyx Pharmaceuticals timed its offering perfectly. Investors want to see a drug developer successfully cross de-risking events, enjoy a bump in the share price, and then conduct a public offering. A higher share price allows a drug developer to raise more cash with less dilution.
Investors can typically expect between 10% and 15% dilution per public offering of common stock for both precommercial and commercial drug developers. That means the most recent offering from Amylyx Pharmaceuticals is within the acceptable range.
Nonetheless, the drug developer might end 2022 with only $291 million in cash. That will likely be spent much more quickly than most investors realize, which makes it important to remain realistic about the path ahead in 2023 and 2024. There will be more dilution eventually. More important, all eyes will be watching whether insurance companies cover the expensive and unproven treatment, which could derail the near-term commercial trajectory before it gets started. At least it took advantage of the approval decision to pad the balance sheet now.