Microbot Medical (NASDAQ: MBOT) provides us with an interesting proof concerning research and clinical stage pharma companies. For if we look at the field more widely it seems that every time there's a significant price rise then there's an issue of more stock. There is good sense to this, those pharma companies are using the stock markets as they are meant to be used - to raise capital. But we do need to incorporate this into our investing techniques - for it puts something of an upside limit on the effects of any good news.
Microbot is developing the Liberty Surgical Robotic System. For very good and sensible reasons much of the testing is being done outside the US and also upon animals - bringing the FDA in at this stage would be wildly expensive. There was a press release indicating how lovely a group of European vets thought the system was. At which point the shares jumped in value. This makes sense. This level of development is about continually passing tests. Someone tries or tests the drug or treatment - it passes. Great, on to the next test. The process only stops if it fails one of these tests. But each pass is a further validation of it and thereby increases the value of the company that owns it.
Microbot Medical stock price from NASDAQ
So, the MBOT stock price almost should rise every time there is the news that the Liberty system has passed another test. But then we come to another feature of this sort of stock. No one ever does fund such developments all the way through. Instead, funding arrives in pieces. The market funds development until the stage of that next test. There's no point in doing more because, of course, it's possible to fail such a test. So, every time one of these validation points, these tests, is reached there's likely to be an issue of more stock. To gain that capital needed to reach the next testing point.
It's also true that having passed a testing point, as the stock price has risen, then raising the money is less expensive. It's necessary to sell a smaller number of new shares to raise any given amount of money.
We then get this in almost pure and classical form here with MBOT stock. The news comes through of the success in Europe, the stock price rises strongly. More shares are issued: “Microbot Medical Inc. (Nasdaq: MBOT) today announced that it has entered into definitive agreements for the purchase and sale of 655,569 shares of the Company's common stock at a purchase price of $2.20 per share of common stock in a registered direct offering priced at-the-market under Nasdaq rules.”
It's almost the definition of the above explanation, isn't it?
The importance of the observation is that we need to keep this in mind. In research pharma, as a sector, any substantial stock price is likely to be met by the issuance of more stock. That puts something of a cap on stock price rises.