Oncogenex offering disappoints investors

The company will need to raise capital eventually; might as well take advantage of the recent spike in the stock price.

By Jim J. Jubak Mar 16, 2012 4:35PM

Can't say I like being on this end of the news for Oncogenex (OGXI) Friday.

The company announced Friday morning that it will sell 4.2 million shares of stock at $12 a share to raise approximately $47 million in capital. The offering is expected to close on March 21.

The stock closed Thursday at $17.43 -- quite a bit above the $12 price of the offering -- and on the news fell nearly 21% Friday afternoon to $13.81.

The drop is understandable. Current investors will face serious dilution to their stake as the company's count of shares outstanding rises from 13.9 million. And I'd sure like to have bought an initial position in this stock Friday rather than at the $15.71 price on March 14, when I recommended this stock for my Jubak’s Picks portfolio. That position is down 12% from my purchase price.

But although I believe the drop is understandable, I think it's, well, wrong. Or at least short-sighted.

Management sees a need to raise capital down the road, and is doing what it's supposed to do. It's taking advantage of a spike in the stock to raise capital at a good price.

Biotech companies raise capital for two reasons -- one bad and one good.

The bad reason is that the company is in danger of running out of money because its research is running behind schedule, or that the existing research direction has turned out to be a dead-end

and a total reboot is necessary. Often in this scenario, a company will clearly have gone through a period of hoarding cash by cutting costs in an effort to get to a place in its research where it can show progress sufficient to go back to the market to raise more capital.

The good reason is that the company’s research is proceeding on or ahead of schedule. Biotech research gets more expensive as it moves out of the lab and into the regulatory and marketing phases. Clinical trials large enough to convince the U.S. Food & Drug Administration to approve a drug are expensive -- especially, as in this case, when a new drug has to prove that it produces a better outcome than existing drugs. Moving from trials to marketing is even more expensive.

Oncogenex’s partner, Teva Pharmaceutical Industries (TEVA), will pick up the tab for a lot of that effort because it will do most of the marketing for OGX-011 after trials are completed in 2013 and the drug wins approval. But besides the $60 million upfront payment, and $370 million in potential milestone payments (and royalties on sales) that Oncogenex got in its deal with Teva, the company retained the right to co-promote the eventual drug in Canada and the United States.

It looks to me like Oncogenex wants to build a drug company and not just a lab. And the announced offer, painful as it may be at the moment, fits with that scenario. (You might ask, and I do, why did the company raise money Friday, instead of waiting for 2013? My guess is that this is a reaction to the incredible volatility of the last year. The lesson from that is take the money when the taking is good.)

Biotech stocks are volatile and this kind of event comes with the turf, I'm afraid. The short story is that if you liked the stock at $15.71 on March 14, you should like it even more at $13.81 Friday.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Oncogenex as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.

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