At the end of the day, some San Diego biotechnology companies long to see George Washington more than you might imagine.
That’s because trading under $1 on the Nasdaq stock exchange for more than 30 days earns a company a warning letter that could result in being booted from the exchange.
San Diego biotechs La Jolla Pharmaceutical Co., Immune Response Corp. and, most recently, Sequenom, Inc. received such letters from Nasdaq, warning that shares must reach the minimum bid price for 10 consecutive days or risk being delisted.
California biotech analysts disagree over how damaging it is to a company’s reputation to trade under $1, but they agree that being delisted can be detrimental.
“The majority of the time when companies flip under $1, you never see them again,” said local biotech analyst and financial adviser Bud Leedom, who publishes the California Stock Report newsletter and chairs the San Diego Growth Stock Conference. “It’s just an elite few that make it out.”
On the other hand, Adam Noah, an analyst from San Francisco-based Merriman Curhan Ford & Co., said, “It’s not the end of the world just because you trade under a dollar,” though he added that the companies need a quick turnaround to save their futures.
Chief executives at the three companies say they have plans to do just that. And they cite successful biotechs such as Thousand Oaks-based Amgen, Inc., the former San Diego-based Idec Pharmaceuticals Corp. and San Diego’s Amylin Pharmaceuticals, Inc. , which all have traded under $1 for short periods in their histories , to argue that a turnaround is possible.
The three local biotechs now on Nasdaq’s Non-Compliant Companies list can regain compliance by maintaining shares at $1 or higher for 10 consecutive days within the 180 days that follow the warning letter. There are certain circumstances under which firms may request another 180 days, according to Nasdaq.
Put On Notice
While Nasdaq gave La Jolla Pharmaceutical and Immune Response warning letters in late April, Sequenom received its 180-day warning Sept. 16.
Sequenom, a genetics analysis company that sells its technology to scientists who use it in research, hasn’t traded above $1 since July 5. Ironically, the firm was listed in August by Deloitte & Touche as one of the 50 fastest-growing tech firms in San Diego in terms of revenue.
Just a month later, Sequenom announced it would cut 44 jobs , most of them in its San Diego headquarters , to save $7 million to $9 million to foster long-term growth. The cuts represent about a 30 percent work force reduction for the company.
The money saved will be put toward research and development of fine mapping and molecular diagnosis technologies, said Chief Executive Officer Harry Stylli, who said he joined the company in June because he saw potential in the biotech.
“I joined it to turn it around,” said Stylli. “The company was never really run as a business.”
Sequenom had $25.4 million cash on hand as of June 30 , enough to last about another year, according to the company.
Established in 1994, the firm is eliminating its chief medical officer position and consolidating its chief financial officer and vice president of finance positions.
Its revenue declined nearly 26 percent from 2001 to $23 million in 2004. Stylli said he expects another drop in 2005, though not as steep. He said the reorganization and reallocation of funds are part of the firm’s makeover.
“The world is full of companies that have traded under a dollar, but they can come back fighting, and Sequenom has the potential to come back with both guns waving,” Stylli said.
“With the products’ potential, my commitment and the board’s commitment, I believe there’s a real chance of making this baby go,” he added later.
But Leedom said he’s hearing echoes.
“You keep getting the same press releases over and over , that they’re really going to take the market by its ears,” Leedom said of companies that hover around or under $1. “I would argue they’ve had their shot and haven’t come through.”
John Bonfiglio, the CEO of Immune Response Corp., which develops drugs to treat HIV and multiple sclerosis, said analysts simply haven’t paid enough attention to his company in recent years.
“This isn’t about shots, it’s about science,” Bonfiglio said. “The (Remune) trial failed (in 2001), but no one looked at why it failed. That’s why I joined this company.”
Bonfiglio took over as CEO at Immune Response in 2003. The company, founded in 1986, has not traded at $1 or above since March 29.
“They can’t or won’t cover stocks under $1, but yet if they did, it would probably go over $5,” Bonfiglio said.
He attributes the company’s low trading price to general market conditions, a failed trial of the company’s main drug, Remune, in 2001, too broad a focus, and previous management.
Immune Response is about to begin another late-stage trial for Remune, a drug to treat HIV. The drug would allow patients with HIV to take one injection every three months instead of three pills a day, Bonfiglio said.
“The frustrating part is trying to convince fairly unsophisticated investors that there is a need for this drug out there,” he said. “We do have a history, yes, but we are making progress and still very excited.”
The 43-employee company’s 180-day probationary period from Nasdaq is up at the end of this month, and Bonfiglio said it has filed a request for an extension.
According to Immune Response’s 2004 annual report, its revenue was $323,000 while it saw a net loss of nearly $30 million. The company has $1 million in cash and has taken a $15 million equity line of credit, which means it can sell common stock as needed to raise money. Bonfiglio said the cash and the credit should take the company into mid-2006.
Since assuming the CEO position, Bonfiglio said he has cut expenses by a third, run an increased number of clinical trials and narrowed the company’s focus from therapies for several diseases to two.
Companies delisted from the Nasdaq face trading on an exchange for firms that are less valued.
“It’s a lot harder to get off the (Pink Sheets and over-the-counter bulletin board) than it is to get on it,” said Leedom. “It’s sometimes a sign that things aren’t going well and you’re not going to improve.”
Worst of all, Leedom said, “It’s more critical for biotech than any other group” to have stock trading at a decent price so a company can sell shares to raise money for clinical trials.
John McCamant, editor of the Berkeley-based Medical Technology Stock Letter, agreed that not having enough money for drug trials is the primary problem that can result from companies trading under $1.
“One option is to merge with other companies,” said McCamant, who has been investing in and analyzing the biotech industry for various companies for 14 years. “You’ve got to have someone who has a decent product or cash.”
None of the three companies said it was considering more layoffs. All three said they were open to mergers if the right opportunity arose.
La Jolla Pharmaceutical, which discovers drugs to treat lupus, recently announced plans to sell 88 million shares of common stock despite its low price.
The company expects to close the deal in December, subject to remaining on the Nasdaq. The firm said it expects to raise $66 million from the sale.
Proceeds should help fund the company for two years, allowing it to complete the last expected trial for its drug Riquent, said Andrew Wiseman, one of La Jolla Pharmaceutical’s founders and the senior director of business development and investor relations.
“A lot of people had given up and assumed we wouldn’t be able to raise the money,” he said.
The firm, founded in 1989, last traded at $1 on Aug. 11.
McCamant said a major cause for the low trading prices among the three biotechs is that companies like these “haven’t delivered” or they have had “failed products.”
In late March, La Jolla Pharmaceutical cut its work force by nearly 40 percent, leaving it with about 85 employees. The cuts came after the Food and Drug Administration said Riquent was not likely to receive accelerated approval.
Accelerated approval allows for marketing a drug to treat life-threatening diseases based on basic evidence before a formal demonstration of the potential benefits for patients.
La Jolla Pharmaceutical is operating at a $6.3 million loss, Wiseman said. It had $21.8 million in cash at the end of the second quarter. When asked if the company will ask Nasdaq for an extension, Wiseman said it will likely “go to Nasdaq and explain we have raised this money and that we think it will turn the company around.”
Wiseman acknowledged the importance of a successful trial for Riquent in regard to the company’s future.
“Most of the value around the company is centered on this lupus drug,” he said.
Recent months have been filled with a host of bad news for the biotech industry in San Diego, including the Nasdaq delisting of Ligand Pharmaceuticals, Inc., for failing to properly file reports. The company has had several problems, including a lawsuit filed by shareholders in August 2004. Late last month, its hedge fund manager called for the chief executive officer’s ouster and sale of the company.
Additionally, shares have plummeted in the last few weeks, about 40 percent to 50 percent, for Cypress Bioscience, Inc., CancerVax Corp. and Hollis-Eden Pharmaceuticals, Inc., as a result of negative clinical trial results or a decrease in demand for products. Those companies’ shares are still above $1, though CancerVax was trading at $1.43 a share Oct. 13.
McCamant said it is negative results of drug trials that are often the culprit when biotechnology companies see their stock drop. But he added that a lack of faith in management can also be a cause.
“If they’re trading below $1, there’s generally a good reason,” McCamant said.
Immune Response’s Bonfiglio refuted the analysts’ prognosis.
“As a CEO who has been involved in a company that has a history, the frustration is not the history,” he said. “It’s that the market and analysts have not taken a close enough look.”