It's been a rough 2022 for shareholders of MindMedicine (MNMD) . Unfortunately, if after-hours price movements hold, it's about to get even worse.
The Canadian drug developer announced its intention to conduct a public offering of common stock. The regulatory filing didn't include the number of shares to be offered, but markets are likely to begin pricing in a healthy amount of upcoming dilution before the details emerge.
The news adds to a tumultuous stretch. Shares have plunged nearly 75% year-to-date and 48% month-to-date through Tuesday's close. The stock is down 33% in after-hours trading. Meanwhile, the dust has barely settled from a 1-for-15 stock split completed two weeks ago. The transaction was needed to regain listing requirements with the Nasdaq.
Considering MindMedicine expected its previous cash runway to last into 2024, why would management feel the need to raise more capital in current market conditions?
Cash Runways for Drug Development, Explained
Precommercial drug developers are synonymous with burning cash. Therefore, even though a company may have a multi-year cash runway, the cash on hand doesn't necessarily factor into a company's market cap. It's as good as gone.
As general rule of thumb, drug developer CFOs try to always keep a 12-month cash runway. We're entering that funny part of the calendar where 2023 is a few months away and 2024 is a little over one year away, not two years away as our brains might try to convince us at first.
That means drug developers with cash runways into 2024 will soon be running up against that 12-month mark. The dilemma is that market conditions could deteriorate between now and the first half of 2023, so CFOs may feel pressured to be proactive in extending the tarmac.
Leaving Nothing to Chance
Pressured or not, MindMedicine CFO Schond Greenway has been kept busy since joining the company in May 2022. The board of directors approved the stock split after he arrived. Meanwhile, the drug developer has raised over $30 million in cash from an at-the-market facility since July 2022.
That alone would have added a nice cushion to the $105.7 million cash balance reported at the end of June 2022. Then again, the company's emerging pipeline will become significantly more expensive to develop as programs mature.
MindMedicine now has six unique programs in clinical trials. That includes MM-120, a version of LSD intended to treat anxiety disorders, and MM-402, a version of MDMA intended to treat social anxiety in individuals with autism spectrum disorder. MM-120 is expected to have topline results from an important phase 2b study by the end of 2023. A successful outcome could create more favorable conditions for raising money, although the cash runway would be well under the 12-month threshold by then.
MindMedicine isn't leaving anything to chance. The company intends to conduct a public offering of common stock now, even after a precipitous decline in the share price, rather than risk an even more difficult liquidity environment in 2023. That will all but guarantee the drug developer can make it through the coming economic downturn without any problems. Of course, the cost of removing that uncertainty tomorrow is a steep round of dilution being paid for today.
On the one hand, psychedelic medicine remains a promising area for drug development. MindMedicine could be a little undervalued at the moment too. On the other hand, the recent volatility is a good reminder that you invest in businesses, not technologies. The company has simply not treated shareholders very well in recent years. More important, the commercial opportunity for psychedelic medicines remains uncertain.
Investors are awaiting details about the number of shares in and the pricing of the offering. An after-hours decline of 33% suggests Wall Street is expecting a large amount of dilution – or at least punishing the company for the unexpected heartburn.
