Last Friday, February 15, Achaogen (AKAO) announced a public offering of 15 million shares of common stock at the price of $1.00/share. In addition, each share was accompanied by one short-term warrant to purchase a share of common stock and one long-term warrant to purchase a share of common stock. Short-term warrants have an exercise price of $1.00/share and long-term warrants have an exercise price of $1.15/share; both classes of warrants are immediately exercisable. Total proceeds from the common stock offering are $15M, and if all warrants are exercised, total proceeds will be $47.25M. Given that as of the end of Q3 2018, Achaogen had 45,967,093 shares outstanding, this common stock offering represents a total dilution of 24.97%; if all warrants accompanying this offering are eventually exercised, total dilution could be as high as 49.96%.
This share offering represents significant dilution for current investors, and announcement of the offering drove the company's stock price down notably. All in all, the offering seems to represent a last-ditch, desperate attempt to keep Achaogen alive for just a few more months while the company explores potential M&A options.
How Much Longer Can Achaogen Stay Operational?
As I discussed in a recent article, Achaogen is near the end of its cash runway: at the end of Q3 2018, Achaogen reported a cash balance of $55.6M. Per Achaogen's Q3 2018 earnings call, the company expects operational costs of around $25M per quarter in 2019 and estimated that the cash the company held on hand prior to the recent equity offering would be enough to sustain the company through Q2 2019. Given the expected burn rate of $25M per quarter, the proceeds from the recent stock offering are not even enough to fund one more quarter. Granted, if investors choose to exercise any of the warrants Achaogen has sold, the company will receive additional proceeds (up to a maximum of $47.25M if all warrants are exercised). However, I think it is unlikely that these warrants will be exercised in the short-term in any significant quantity - investors would likely want to see some positive news out of Achaogen and some indication that the company can make a sustained push above the $1.00/share mark before exercising any of those warrants.
In my last article on Achaogen, I speculated that with its significant burn rate and lack of short-term revenue prospects, the company might have trouble finding further funding. Of course, I was immediately proven incorrect - Achaogen announced the pricing of their stock offering the day after my article was published. However, I should have been more clear with my words - I did not believe Achaogen would be able to find significant, meaningful funding, and in that respect, I was correct. This most recent offering did little to shore up Achaogen's cash balance and provided the company with just a few more weeks of runway - hardly the huge capital infusion the company would have needed. To me, the pricing and size of Achaogen's last offering (along with the inclusion of warrants) signals that Achaogen at this point is almost certainly unable to secure any significant funding.
Company's Clinical Assets Provide Potential M&A Value
Though Achaogen's business plan/model appears unsuccessful, the company does possess several clinical assets that would be valuable to established pharmaceutical companies.
Source: Zemdri.com
First, obviously, is Zemdri, Achaogen's only approved drug. Zemdri was approved in June 2018 for the treatment of complicated urinary tract infections (cUTI) but received a CRL for bloodstream infections such as CRE.
Source: Achaogen Investor Presentation
Achaogen has estimated that the potential inpatient cUTI market for Zemdri represents around 360,000 patients. In addition, it is important to note that around 50-60% of Q3 Zemdri sales were to outpatient centers. All in all, it is clear that there is a market for Zemdri; that said, Achaogen does not have the capital, resources, or ability to successfully commercialize the drug. However, a larger, commercial-stage pharmaceutical company with an experienced sales force and established distribution and sales channels would likely be able to effectively and profitably bring Zemdri to a wider market.
Beyond Zemdri, Achaogen is currently working on developing another antibiotic compound: C-Scape. C-Scape is an oral antibiotic designed to fight cUTI in patients suffering from multi-drug resistant, Extended Spectrum Beta Lactamase (ESBL)-producing pathogens. Though C-Scape is currently only in Phase 1, it would likely be of interest to any potential Zemdri buyer.
Given the fact that Achaogen does not have the capital it needs to commercialize Zemdri and develop C-Scape, I think it is likely that the company is currently exploring its M&A options. The company's scientific assets certainly have commercial potential, and I would imagine that there are buyers interested in picking up an approved drug in Zemdri for a potentially heavily discounted price. Now, the question is whether a potential buyer will choose to purchase only Achaogen's clinical assets or make an offer for the entire company.
Why Hasn't A Deal Been Reached Yet?
Unfortunately, for Achaogen, any potential buyers have realized that the company is out of money and options. As such, buyers know that they can afford to wait Achaogen out - the company will likely only continue to lose leverage for negotiations as time goes on, allowing a potential buyer to hopefully secure a better purchase price.
It remains to be seen how Achaogen proceeds over the next few months - my guess is that we'll see the company announce some sort of buy-out or asset sale within the year. At the moment, it's clear that the company is desperate: announcing 25% dilution for a mere $15M in funding is not a move a strong company with solid future prospects would have made. Given this desperation, unless Achaogen's billionaire activist investor Robert Duggan - who owned 20.32% of outstanding shares before the equity offering - steps in and purchases the company himself, I'd expect to see the company and its assets sold for fire-sale prices in the near future. At this point, an investment in Achaogen represents an enormously high risk, with a minimal potential reward.
Author's Note: If you liked this article and want to read more pharma ideas like this, click here to access my profile - then just click the big orange "Follow" button. Thanks, and good luck!
