Orexigen To Do 1 For 10 Reverse Split

| About: Orexigen Therapeutics, (OREX)

Summary

Company was out of NASDAQ compliance with a stock price below $1.

Reverse split will correct NASDAQ compliance issue.

Reverse split does not resolve ongoing issues relating to sales of anti-obesity drugs.

Orexigen (NASDAQ:OREX) investors that do not follow the news may be a bit shocked to see the stock trading at over $4.00 per share when Tuesday arrives. The new stock price will be the result of a 1 for 10 reverse stock split enacted so that the company can re-gain compliance with NASDAQ listing requirements. Orexigen made the announcement after hours on July 8th.

There have been a few regular readers that had expressed that they felt a reverse split would not happen. Seeing where we are now should be a lesson in looking at things in a realistic manner. Now that the reverse split is going to transpire, it is more imperative that readers understand a few critical items.

  • A reverse split does not solve the issues that brought the stock below $1 in the first place. It only resolves the listing requirement of NASDAQ to trade above $1 per share.
  • Most often a reverse split that is forced upon a company is not viewed as positive, but rather as an act of desperation.
  • More often than not, companies actually trade down after conducting a reverse split.

My opinion on the Orexigen reverse split is that investors need to be cautious. The company will be in the same boat on Monday as it was on Friday. Management has not changed. Insurance coverage on Contrave has not changed. There is no increase in sales reps. There is no shift in doctor sentiment.

What we have is a company that has gone from a float of 145 million shares to a company with just 14.5 million shares. This low share count can bring extra volatility that is likely good for active traders, but very frustrating for longer term shareholders. Transactions involving just 1.4 million shares are actually seeing 10% ownership in the company change hands. Investors need to grasp that the volatility in this equity may become dramatic in the weeks ahead.

With sales in the anti-obesity sector seeing minimal and even negative growth, the prospects of a company that has its entire future staked to a failing sector is perhaps more bleak than many long-time holders would like to admit.

In my opinion, investors should be prepared to see this equity go from an opening price of $4.45 or $4.50 on Monday to a closing price that see's at least 4% or 5% of the value evaporate by the end of the week. It is just the way things are when companies are forced int9o conducting a reverse split.

Those that likely need to have the most critical eye with regard to this stock are those that thought that a reverse split could be avoided. Now, more than ever, it is time to assess. Stay Tuned!

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

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.

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