The FDA sent all three obesity drug companies — Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), VIVUS, Inc. (NASDAQ:VVUS), and Orexigen Therapeutics, Inc. (NASDAQ:OREX) — back to the drawing board, causing share prices to drop. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) and VIVUS, Inc. (NASDAQ:VVUS) were eventually able to get their drugs approved without any additional clinical trials, but Orexigen Therapeutics, Inc. (NASDAQ:OREX) had to run a large safety study, necessitating a large capital raise. Its market cap also dropped the lowest of the three, making raising cash more dilutive to shareholders.
There’s one more moral to this story. Having cash going into a binary event can help reduce the amount investors are diluted. VIVUS, Inc. (NASDAQ:VVUS) ended 2011 with nearly $150 million compared to a little more than $50 million for Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). The cash helped VIVUS, Inc. (NASDAQ:VVUS) maneuver the rejection more easily than Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).
Foolish take-home message
Investors would be much better off if brokerage firms and finance websites would give quotes in market caps rather than share prices. Over the short term, share price is an OK indication in change in value, but over the longer term, share price becomes fairly meaningless as companies sell shares, diluting current shareholders. As an added bonus, it would give investors a relative valuation compared to its peers.
The article Attention Biotech Investors: Stop Looking at Share Price originally appeared on Fool.com and is written by Brian Orelli.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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