Whether you feel Orexigen (NASDAQ:OREX) has potential or is doomed for failure does not really play into a NASDAQ de-listing process. The process has set guidelines and there is very little room for subjectivity within those guidelines.
The first thing that investors need to understand is what brought about the de-listing notice in the first place. What happened is that Orexigen stock traded below the minimum bid price of $1.00 per share for 30 consecutive trading days. Had the closing bid price been above $1.00 per share for just one of those trading days, the company would not have received a de-listing notice.
After the de-listing notice is sent out there is an automatic "grace period" in order to gain compliance. In the case of Orexigen, that grace period is 180 days. Essentially, the company has to get itself back up above $1 dollar per share. The important difference is that it now needs to carry a closing bid price of $1 per share or above for 10 consecutive trading days, and not just one. The key date for investors to keep in mind is October 10th, 2016. That day marks the 180th day of the grace period. Perhaps more important is that investors keep September 27th noted. If the company is not above $1 per share on that date, getting 10 consecutive days prior to October 10th is impossible.
While anything is possible, the chances of trading above $1 per share for 10 consecutive trading days prior to October 10th are not as good as some may think. Orexigen stock currently trades at just $0.44 per share, and we have already seen several days of the 180-day window pass.
The most common mechanism for gaining compliance on a stock price is for the company to perform a reverse split. A reverse split essentially trades new shares for a higher number of old shares. For example, a 1 for 10 reverse split on Orexigen today would trade 1 new share for 10 old shares. The corresponding stock price would be $4.40 per share. This accounting function solves the listing requirement of being above $1 per share by a function of creating fewer shares with more value each. The market cap does not change with a reverse split, but the number of shares and value of each share does. A reverse split does nothing to correct the underlying issues that had the share price dipping as low as it has in the first place.
In order to do a reverse split, the company must gain approval of the Board of Directors and the shareholders. I fully expect this matter to be one of the items that shareholders will vote on in the annual meeting. I also anticipate that a potential reverse split will be approved. Likely, investors will be asked to approve a range rather than a specific number. By example, the proxy question may ask shareholders to approve a reverse stock split of between 1 for 5 and 1 for 15. This range gives the Board and management latitude and accounts for the possibility of the stock price going even lower. The worst situation is getting approval for a reverse split that does not get the company back into compliance.
If a reverse split is so easy, why should investors be concerned? The answer to that question has many complexities:
- As stated earlier, a reverse split does not correct the underlying issue that brought about a low stock price to begin with.
- A reverse split is rarely seen a positive, in particular when the reason for the reverse split is tied to listing requirements
- Institutions that might otherwise want to invest may avoid investing in a company that is out of compliance.
- The ability to get financing or renegotiate financing, if needed, can be impacted
- Reverse splits are oft viewed as acts of desperation
The bottom line on Orexigen is that there are a lot of things that need to go right for the very viability of this company, and if only a few things go wrong, investors could find themselves in a situation that is even worse than where they already are.
Yes, sales in South Korea and Europe are slated to begin in the second half of the year, but neither region is going to be viewed by the street as compelling until sales prove that it will be compelling. Competitor Arena (NASDAQ:ARNA) is selling Belviq in South Korea already and is logging just 2,500 scripts per week. The Contrave presence in Europe is starting off with smaller nations that are not the top tier in terms of pharmaceutical sales. Even if we were to assign 5,000 scripts a week to Europe as a level that can be attained by year end, the total Contrave sales would be in the neighborhood of 20,000 to 25,000 scripts per week. Sales at this level do not bring in the needed revenue to drive equity appreciation.
In my opinion, the company will be forced into a reverse split prior to gaining the level of sales traction needed to drive investor confidence. This could mean that even after a reverse split, the equity could still be in a downward trend and under severe pressure even while selling more scripts than anyone else.
Many Orexigen investors are under water on this equity because they invested on the concept that there are many overweight people looking for solutions and Contrave seemed to be a viable solution that was destined for success. Vivus (NASDAQ:VVUS) and Arena investors carried the exact same thought process. The reality is that the anti-obesity market is nowhere near as robust as investors had hoped to see. In my opinion, holding out hope that South Korea and Europe can change the narrative is something that simply should not be done. The pharma companies in the anti-obesity space now need to prove that they can muster enough sales to deserve investment dollars.
The bottom line is that investors should not be in the business of trying to defend a thesis that has simply been proven incorrect. They should also not invest on the hope that the dynamics will change simply because a new region is added to the mix. If an investor wants to toss a few bucks in speculation, that is one thing. Investing a big portion of your portfolio in this sector could see you as very disappointed investors sooner rather than later. The de-listing process will take time, and certainly the company will paint as pretty a picture as they can, but realities are realities. Anti-obesity drugs are not selling at the levels needed to bring about stock price appreciation. Stay Tuned!
Disclosure: I am/we are long OREX, ARNA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no position in Vivus
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