iBio Still Overvalued; More Dilution Likely

Jun.29.11 | About: iBio, Inc. (IBIO)

It's been a rough couple of months for shareholders of iBio (NYSEMKT:IBIO). I became interested in the company after its meteoric runup to $6 a share this past winter, but after looking into the company's situation, I concluded it was greatly overvalued. Since then, the shares have fallen 50% to under $3. But even at these levels, the stock is no bargain; in fact, it's hard to imagine any scenario where iBio shares trade up in the near future.

According to the company's latest 10-Q, the company only has sufficient liquidity to continue operations through September of this year. It rather ominously states that:

We plan to fund our development and commercialization activities beyond that date primarily through licensing arrangements and/or the sale of equity securities. We cannot be certain that such funding will be available on acceptable terms, or available at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution.

So the plan to raise capital is either generating revenue or selling more stock. Apparently, despite having no debt, the company is unable or unwilling to get credit (which should tell investors something). Since the company has generated precisely $176,000 of revenue in the past year, it's hard to imagine revenue suddenly ramping up to cover the company's roughly $6M annual cash burn rate. I have to think that if some new source of revenue were coming, the company would have put out a cheery press release to notify investors already.

Since revenues are unlikely to miraculously appear before September, and the company hasn't mentioned debt as a potential funding source, there is but one answer, more equity dilution. Given that the company needs ~$500,000 each month to keep the lights on, and that an equity offering could probably happen (at present prices) in the $2.50/share range, the company would need to offer roughly 200,000 shares per month of continuing operations. Given the low trading volume in iBio shares, the effect of that much new stock hitting the market will be quite deleterious for present shareholders.

Of course, if the company is unable or chooses not to dilute present shareholders, the effect will be even worse. The company's 10-Q states that:

If we are unable to raise funds when required or on acceptable terms, we may have to: a) Significantly delay, scale back, or discontinue the development and/or commercialization of one or more product candidates; b) Seek collaborators for product candidates at an earlier stage than would otherwise be desirable and/or on terms that are less favorable than might otherwise be available; or c) Relinquish or otherwise dispose of rights to technologies, product candidates, or products that we would otherwise seek to develop or commercialize ourselves.

Given all the above information, it's hard to see any alternative except dilution coming for iBio in the near future. While there were a series of catalysts for iBio earlier in the year, these catalysts have since come and gone. The potential catalyst of FDA approval of iBio peer Protalix's (NYSEMKT:PLX) drug ended up turning into a negative; Protalix did not get immediate FDA approval, and both PLX and IBIO sank. iBio also released results of its H1N1 vaccine trials, but these failed to generate any significant market enthusiasm. Now, it seems, there is no potential catalyst to boost shares before the inevitable dilution announcement arrives later this summer.

While iBio may end up eventually producing good research that can be monetized, we're nowhere near that time yet. At this point, the market has assigned a $90 million market cap to a three employee operation with three months of cash left, and revenues of less than $200,000 (iBio's price/sales ratio is an otherworldly 533). Even if you are a firm believer in iBio's technology, there's no compelling reason to buy the stock now; wait until the stock gets inevitably cheaper as the share price suffers from repeated dilution and then purchase.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.