The simple genius of this proposal begs the question: Why haven't biotechs been doing this all along?
Here's what usually happens when a trial failure leaves a biotech with money in the bank and nothing left to spend it on.
Scenario 1: The biotech merges and pours its cash into another biotech's high-risk, early-stage pipeline, which investors usually hate. Novacea's stock tanked when it merged with Transcept (TSPT), and angry investors twice blocked VaxGen (VXGN.OB) from merging with Raven Biotechnologies and Oxigene (OXGN).
Scenario 2: The biotech embarks on a lengthy review of strategic options, and the management and board collect hefty salaries and burn cash while doing what some might contend a negligible amount of work. Brings to mind Avigen, though they were eventually pushed into an acquisition by MediciNova (MNOV); VaxGen, though as noted above at least they're trying; and Neurobiological Technologies, which some investors said took far too long to liquidate.
Here's what Capstone is proposing: Phase II data with anti-scarring drug AZX100 are due later this year. Those data should clearly show whether or not the drug has a future, and Capstone won't use up its entire $40 million bank to get to the answer. So investors will be given a "put option" that allows them an easy out mid next year.
If the trial succeeds, the stock will presumably skyrocket above Capstone's cash value so the put option will be moot. But if the trial fails and the stock tanks below cash value, investors can either stick with the company as it pursues one of the scenarios above or take the remaining cash and walk away.
There's still risk -- Capstone trades at just over a buck now and estimates the put option payout next year would be in the range of 35 to 40 cents per share. But at least investors know where the bottom is, which is pretty much unprecedented in biotech.
The put option model wouldn't work for everyone. Some biotechs that fail don't have any cash left anyway, and others have rich pipelines to reinvest in. But there are plenty of well-funded one-trick-ponies out there who might want to take a leaf out of Capstone's book.
Money-and-Run photo by Flickr user Southtyrolean, CC.