KOD stock soared today on news of the sale of future royalties on KSI-301 for $225M. In after-hours trading the stock dropped -8% on news of an equity offering.
In pre-market trading today, the company announced that it has entered into a funding agreement to sell a capped royalty right on global net sales of KSI-301 to Baker Bros. Advisors for $225M. KSI-301 is Kodiak’s investigational therapy being developed for the treatment of retinal vascular diseases including age-related macular degeneration and diabetic eye diseases. Under the terms of the agreement, Baker Bros. Advisors, or BBA, purchased a capped 4.5% royalty on net sales of the company’s anti-VEGF antibody biopolymer conjugate therapy known as KSI-301 to be paid upon marketing approval in exchange for $225M in committed development funding payable to the company. Unless earlier terminated or re-purchased by the company, the royalty “caps” or terminates upon the date that BBA has received an aggregate amount equal to 4.5 times the funding amount paid to the company. In an instance where Kodiak develops anti-VEGF containing follow-on products to KSI-301, there may be royalties of 1.5% to 2.25% owed on these products, but total payments under the funding agreement will never exceed the cap of 4.5 times the funding amount paid to the company. BBA is required to pay to the company the first $100M of the funding amount at the closing of the funding transaction and the remaining $125M of the funding amount upon Kodiak achieving, among other things, 50% enrollment in its two planned pivotal clinical studies of KSI-301 in patients with retinal vein occlusion. The company has the option, exercisable at any point during the term of the funding agreement, to repurchase from BBA 100% of the royalties due to BBA under the funding agreement for a purchase price equal to the funding amount paid to the company as of such time times 4.5 less amounts paid by the company to BBA.
KOD stock soared more than 42% on the news.
Then came the low-down equity offering and the stock collapsed in after-hours trading.
Kodiak Sciences Inc. (Nasdaq: KOD) announced that it has commenced an underwritten public offering of $250,000,000 of shares of its common stock. In connection with the proposed offering, Kodiak Sciences expects to grant the underwriters a 30-day option to purchase up to an additional $37,500,000 of shares of its common stock at the public offering price, less underwriting discounts and commissions. All of the shares in the proposed offering will be sold by Kodiak Sciences. The proposed offering is subject to market and other conditions, and there can be no assurances as to whether or when the proposed offering may be completed, or as to the actual size or terms of the proposed offering.
J.P. Morgan, Goldman Sachs & Co. LLC and Jefferies are acting as joint book-running managers for the proposed offering.
The shares described above are being offered by Kodiak Sciences pursuant to a shelf registration statement on Form S-3, including a base prospectus, that was previously filed by Kodiak Sciences with the Securities and Exchange Commission (the “SEC”) and was declared effective on November 14, 2019. From that S-3 filing it reads, “Under our amended and restated certificate of incorporation we are authorized to issue up to 490,000,000 shares of common stock.”
This is why you should never chase clinical stage biotech companies.
From the S-3 filing, the company disclosed:
“We have incurred significant losses and negative cash flows from operations since inception and had an accumulated deficit of $130.1 million as of June 30, 2019. We had $68.1 million in cash and cash equivalents and marketable securities as of June 30, 2019. We have historically financed our operations primarily through the sale of redeemable convertible preferred stock, convertible notes, warrants and the sale of common stock in our initial public offering. To date, none of our product candidates have been approved for sale and therefore, we have not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. We currently plan to raise additional funding as required based on the status of our development programs and projected cash flows, and we believe that our cash and cash equivalents and marketable securities as of June 30, 2019 are sufficient to fund our existing operational commitments and objectives at least through the first half of 2020. In accordance with Accounting Standards Codification 205-40, Going Concern, we have concluded there is substantial doubt about our ability to continue as a going concern for a period of one year from the date of this registration statement. While we currently plan to raise additional funding, there is no guarantee that we will be successful in these efforts.”
Don’t get me wrong. I’m not saying the sky is falling in KOD stock. What I’m saying is that when you can book a 40 percent win in a single day, in a risky clinical stage stock, you should take it and move to the sidelines and the safety of cash before the book runners come along and dilute the stock to ‘raise’ even more money.