Key points:
- Iterum Therapeutics was down 20% yesterday, up 1,500% today
- Clearly something is going on but what is it?
- The combination of real and nominal changes means the value is down 20%
Iterum Therapeutics (NASDAQ: ITRM) stock stopped near 20% yesterday (ITRM was down 19.24% to be exact) and today it's up 1,500% (1,536% to be accurate) so there's clearly something going on here. But what is it, what could be making Iterum stock jump around like this? The answer being that we've both a real change in the value of Iterum as a company and also a nominal one. Normally the particular tactic in use is employed to try to increase the real value, the nominal just coming along for the rise. The problem here for ITRM is that it's the real value that has fallen even as the nominal value has soared.
This isn't the way folk might hope it would go. As to what Iterum Therapeutics does it's a clinical stage pharma company developing anti-infectives. An important thing to be doing given the lack of new antibiotics these days. Also, if the treatment works and gains FDA approval, a potentially very profitable line of business. It's at the stage of Phase III trials for sulopenem for example, for the treatment of urinary tract and abdominal infections. Phase III being where large scale testing is done to check upon side effects that wouldn't turn up in smaller scale trials.
There's not much revenue around at such a development stage but there sure are costs. Iterum is well enough funded to be able to continue operations into 2024, so it says. Effectively it's an interesting pharma company at a particular stage of development. Future value depends upon the outcome of those Phase III trials.
Also Read: Five Best Pharmaceutical Stocks to Watch in 2022
The specific price movements are the result of a reverse stock split – consolidation to Brits. It's a 15 for 1 reverse spilt – each $0.01 former share is now a $0.15 paid up capital one. Everyone who owned 15 pieces of stock before now owns one. This should not, not at first pass, change the overall valuation of Iterum, it's a purely technical change. The market capitalisation should be the same before and after, the value of any individual holding also so.
But this isn't the way that it often works out. The reason for doing it is that to maintain the NASDAQ quote it's necessary to beat the minimum offer price of $1 a share. As prices fall below that then something must be done. One option is to revolutionise the business to make it so, the other is to fiddle with the stock numbers and change the nominal price.
With a 15 for 1 the stock price at ITRM should jump 1,500%. As Iterum is up 1,536% then that seems the end of it. Except we should include the 20% drop the day before. The stock split was only announced well after close Tuesday night. So our starting point should be $0.27 cents as our calculation price. 15 times that is $4.05. That's what the effect, on purely technical grounds, of the reverse split should be therefore. But the price is $3.33 according to NASDAQ. That is, we're 20% down on our starting point, just as with the 20% fall on the day of the split announcement.
Reverse stock splits do solve the NASDAQ minimum offer price problem but they don't necessarily add enterprise value as a result.