Seastar Medical Holdings (NASDAQ: ICU) stock is up 80% and more Thursday morning. On no apparent news and there doesn't seem to be any good reason. Of course, with a market capitalisation of only $8 million it doesn't take much buying pressure to move the price. And as we know once a price starts moving in a microcap then it can just keep on moving. The so-called momentum trade, the price moves simply because the price is moving. Momentum trades can be most fun but they are gambling, not investing. Simply because none of us ever knows when the momentum is going to fade away or even reverse.
It is possible to take a more objective view of Seastar and if we do that then we're not going to come to any flattering conclusions. Certainly nothing that would suggest that the company is worth 80% more today than it was yesterday. If we look at the latest accounts we see they've some $700k in cash. They've $3 million in accounts payable (and more in accrued expenses) and operating costs of some $4.5 million a quarter.
It's not obvious they're even solvent let alone have a runway to get a product authorised. The particular and specific problem, we think, is that they took a calculated gamble that didn't pay off.
Seastar Medical Holdings stock price from NASDAQPharma development just eats capital. Until something is FDA approved there's no real asset there so debt finance isn't really available. So, it has to be shareholder capital paying for everything. During the development process there are a number of valuation points. Passing Phase I tests, getting the FDA to approve the Phase II design and on and on. What tends to happen is that the capital funding is raised in stages. To get from this valuation point just passed through to the other side of the next one. The obvious reason being that having passed a valuation point - like Phase I success - the company is worth more so less of the company has to be sold to finance the capital needed to reach the next valuation point.
This works just great as long as the valuation points come up trumps. For Seastar: “SeaStar Medical Holding Shares Drop After US FDA Rejects Application” Ah. It didn't pass that latest valuation point. Other things were going well, a distribution agreement for example.
You can see how this could work. We know we need to raise more cash but we've this FDA decision coming up. When we pass that then the stock issue will be less dilutive. So, let's wait. Until, of course, the FDA didn't approve. Seastar basically needs more money, more capital. How it's going to get it at this stock price is a difficult problem to solve. Indeed, without being hugely dilutive, it's not obvious that it is solvable.
The objective view is that Seastar just isn't valuable but people are speculating in it anyway. Oh well.