XBI - Scynexis: Uninvestible At This Point Downgrading To A Sell Rating

Summary

• SCYX has a commercial antifungal Brexafemme. However, we are neutral on its commercial potential as discussed in our previous article.
• No big pharma deal materialized, and the company raised USD45M through pre-funded warrant offerings.
• The drug's true upside is in systemic fungal infection; however, catalysts are expected in 2024-2025 at the earliest making the stock uninvestible at this time.
• We downgrade SCYX to a sell rating.

Background

As described in detail in our initiation of coverage , we have established an option size position on SCYX based on a potential big pharma M&A and undoubtedly cheap valuation (negative EV) of the company. However, with the recent messy financing deal (described in detail below) and lack of near-term clinical catalyst, we decided to sell out of the position and downgrade the stock. Our rationale is described below.

Catalysts are expected in 2024-2025 the earliest

The absence of short-term catalysts makes it un-investible for short-mid-term investors in our view. We think the major value driver of the stock is in the systemic infection space, where the catalysts are expected in 2024-2025 (as shown below). Of note, the company announced that the FDA has accepted SCYX's submission of a supplemental New Drug Application regarding label expansion of BREXAFEMME to include "prevention of recurrent vulvovaginal candidiasis" and the target PDUFA date is Nov 2022. We believe the label extension is fully priced in and any positive news will be a selling opportunity for this ticker.

Messy pre-funded warrants make SCYX uninvestible in our view

SCYNEXIS priced its earlier announced underwritten public offering of 3.33M shares of its common stock, prefunded warrants to purchase 11.67M shares of common stock and warrants to purchase an aggregate of 15M shares of its common stock with gross proceeds expected to be ~$45M.

The shares and warrants are being sold at $3.00/share and pre-funded warrants are offered at $2.999/pre-funded warrant and accompanying warrants. Underwriters over-allotment is an additional 2.25M of shares and/or warrants to purchase up to 2.25M shares of common stock.

The warrants have a seven-year term and an exercise price of $3.45/share.

-Source: Seeking Alpha News April 22

The company has a long history of raising capital through messy warrants which caused the stock to tank even after the approval of Brexafemme in June 2021 (as shown below); we believe the same thing is likely to happen with any positive catalyst making the stock uninvestible. Warrants could be a catastrophe as warrant holders can start exercising their warrants and sell into the market when a stock price move above a certain level and the exercised shares were sold into the market killing the share price.

We believe the likelihood of a potential M&A has dropped considerably at this point.

In our view, issuing a structure deal involving pre-funded warrants is almost a last resort type of financing measure that most pharmaceutical companies tend to do if any type of other financing methods (royalty, M&A, pure equity, and debt) is unlikely due to the amount of dilution that it brings and how it usually punishes investors. This may indicate that the company's assets have already been shopped around by big pharma or royalty investors and the deal end up not materializing, even though it is just a guess on our part. This makes us believe that the prospect of a potential M&A has dropped considerably at this point.

Risks

Business Risks include: i) clinical trial failure, ii) commercial risk under-delivering revenue, iii) intellectual property risk where the company loses exclusivity.

Trading Risks i) liquidation of stock can lead to a loss in capital especially for illiquid stocks like SCYX if sold at a market sell, and ii) selling too early can lead to tax implications for some investors.

Conclusion

We downgrade SCYX to a Sell rating as i) the key catalyst that we were hoping for in our previous article , big pharma M&A, is becoming more and more unlikely to materialize and ii) messy warrants make it impossible to invest due to potential dilution.

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