Hookipa Pharma (NASDAQ: HOOK) stock has dropped 15% this morning premarket on the announcement of a stock and warrants issue. There’s been a certain amount of concern that this might happen, that Hookipa would take advantage of the change in sentiment surrounding the company to raise more capital. What will matter to the Hookipa stock price going forward is a combination of the usual technical issues surrounding an issue and the views on what uses the capital is to be put to.
To go back a little bit, Hookipa has had two pieces of good news recently. One was that the FDA has agreed that one of its products – a drug combo for head and neck cancer – was given fast track status. That lowers development costs but more importantly, it lowers development time. That reduces the capital need to get to market – if, indeed, that does ever happen.
The other piece of news was that Gilead renegotiated its agreement with Hookipa. This involved some advance payments and so on for the use of outputs from Hookipa’s development pipeline.
So, clearly, the company’s prospects had improved. At which point the stock price moved up – it had been rumbling on at the $1.50 level and it jumped to the $2.40/2.50 level.
Which brings us to the thing about development-stage pharma companies. They eat capital – that’s just the stage of business life they’re at. So, if the stock price improves this will lower the dilution associated with any capital raise. Or, run it the other way around, the stock prices rises and there will be a capital raise. Which is exactly what has happened. At which point the stock price drops that 15% we’re seeing because of course this means there’s more stock around.
What matters now is how will the price change in the future. First, there are the usual technical issues. Will the underwriters find safe and secure long-term investor homes for the new shares? Or will there be a float of those anxious to offload any time the stock price rises? The usual assumption here is that until any such “loose” stock has found a long-term home then there will be little upward price movement.
After such short to medium-term issues, there is then the concern over what the new capital will be used to do. According to Hookipa this is to fund ongoing operations and provide working capital. So, the money’s not going to go on any new adventure but to continue to fund their extant research and activities.
Which, given that the work they have been doing has gained that FDA fast track authorisation, also the interest of Gilead, might be a good use of such extra capital.
There will be greater clarity on Hookipa’s stock price once more is known about how and where the underwriters have managed to place the new stock.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.