Verastem (NASDAQ: VSTM) stock should rise 1,200% this morning. There are two slightly unfortunate things about this. Firstly this is not a real price rise. Unlike the 130% jump in the price on Friday, this is a purely nominal change, one that makes no difference to the value of any shareholding, or of the company as a whole. The other is that it costs money - not a lot but some - to achieve this price rise but it's all being spent to solve a problem that is, in fact, already solved.
The background here is that the American stock markets are in the grip of a fashion, a cultural prejudice perhaps. The thought is that penny stocks - those below $1 - are the home of manipulators and frauds. It is true that that's where the manipulators and frauds tend to concentrate their work, yes, but the reverse, that all such are home and prey to them isn't correct. Still, that prejudice exists. So, penny stocks cannot be on the main exchanges. Have a stock price below the $1 minimum bid price for long enough and you will lose your NASDAQ or NYSE quotation. There's a solution to this, the reverse stock split.
Verastem stock price from NASDAQ
Note that that's showing us the post-reverse split stock price, but that the opening price, in the little box, is the pre-split price.
So, what has actually happened here is that the VSTM stock price had already got above that NASDAQ minimum $1. But they've still gone ahead with the 12 for one reverse split. That's what we mean by spending money to solve a problem already solved.
The reverse split just means that every 12 pieces of stock now become one piece. This doesn't - not directly and by itself - change the overall valuation of the company, nor of any particular shareholding. It just changes the number of pieces of paper which make up either, thereby changing the price of each piece of paper.
The thing that also happened is that one of Versatem's drug candidates reported good results: “Verastem (NASDAQ:VSTM) climbed ~131% on Friday after announcing that 45% of patients with ovarian cancer who received the experimental therapy avutometinib as part of a combination regimen indicated a decrease in tumor size in a Phase 2 trial.” That 130% in the real price change that has just happened - the one that says that the nominal change from the reverse stock split isn't, wasn't, actually necessary.
On the other hand there's nothing wrong with a management that believes in both belt and braces. Getting that stock price back up was necessary and they've made sure of it, both through the nominal and real price rises. So full marks to them for that.
