Epic Short Squeeze?
Last week, the biggest news in biotech was Lundbeck’s $2.6b acquisition of Longboard Pharmaceuticals (Nasdaq: LBPH). However, Longboard’s success was arguably overshadowed by its 5HT2C micro-cap peer, Bright Minds Biosciences (Nasdaq: DRUG), whose stock soared over 3,000% the day following the acquisition news. Social media exploded, with everyone weighing in on Bright Minds’ situation, from day traders to some of the most followed biotech voices. Most attributed the violent stock move to a formula of Bright Minds’ low float combined with repeated short squeezes while being generally dismissive of the company’s science. Then Perceptive Advisors filed a 13G disclosing a 9.6% position in Bright Minds, followed by Cormorant disclosing an even bigger position, and finally, a well-executed $35mm financing ($21.699/share). This begs the question, was this violent move in Bright Minds just an epic short squeeze, or is there something more fundamental behind the stock’s incredible performance?
A “Trip” Down Memory Lane
We first started talking about Bright Minds in 2021. During our short-lived podcast experiment, Bright Minds was our first interview. Given the substantial interest in psychedelics at the time, the company’s 5HT2A compound piqued our curiosity. Unlike most psychedelic companies, Bright Minds worked on novel chemistry for selective 5HT2A agonism, and we were impressed with their early science and NCE approach. The company also had a selective 5HT2C program that, although further advanced and de-risked (given Zogenix’s Fintepla approval) than the 2A program, was considered secondary to their psychedelic endeavors. We were also impressed that smart money funds, Orbimed and Sphera, had taken meaningful positions in the company. There were red flags, though, most notably their CEO, Ian McDonald, a former Canadian investment banker, had no previous biotech experience, and the company lacked a proper listing, being on the OTC and the obscure Canadian Stock Exchange. The company did manage to uplist to Nasdaq late in 2021, just as the biotech market entered one of the worst stretches in its history.
We followed Bright Minds over the next few years and stayed in touch with CEO McDonald. Like many micro-cap biotechs, their stock eroded during the biotech bear market, and the company was forced to consolidate to remain Nasdaq compliant. Not surprisingly, the company was also cash-constrained, forcing it to re-prioritize its clinical investment to the more advanced 5HT2C program. In late 2023, the company completed a Phase 1 study with their lead 5HT2C asset, BMB-101, which included encouraging signs of CNS activity as measured by EEG. Despite these encouraging, early data, the company traded by appointment and at a valuation near its meager cash balance.
Two events in late 2023/early 2024 renewed our interest in Bright Minds. The first was CEO McDonald’s $900K treasury investment via a December private placement. The second was Longboard’s successful Phase 2 study with their 5HT2C agonist, bexicaserin, for the treatment of epilepsy disorders, known as Developmental and Epileptic Encephalopathies (DEEs). In January of this year, we wrote, “Bright Minds had a bumpy last few years, but when we saw the recent investor excitement around Longboard and their 5HT2C product, we thought it was a speculative name worth revisiting.” We couldn’t have foreseen the Lundbeck acquisition of Longboard, but the correlation between Longboard’s success and potential investor interest in Bright Minds was something we speculated could happen.
The Answer to our Earlier Question
Bright Minds is more than a short squeeze. The company has real science and has been able to attract real investors. 5HT2C is a well-validated target, and there is real evidence of M&A interest for 5HT2C assets, with Zogenix (UCB) and now Longboard’s acquisition. The company should have Phase 2 data in 1H2025 for BMB-101 in a basket of drug-resistant epilepsy disorders. The company now has a treasury that should allow it to invest in its pipeline beyond 5HT2C. Despite our earlier misgivings, CEO McDonald has proven to be an effective financial steward for the company.
Bright Minds is a real company, but there is no denying that traders currently have the company in their grips. It should only be considered a trade until the market settles and Bright Minds finds a stable valuation range. As of Friday’s close, on a fully diluted basis (all warrants and options are heavily in the money), we estimate Bright Minds carries a ~$375mm market cap but oscillates wildly between $250-$550mm. For perspective, Longboard carried a ~$150mm valuation heading into its Phase 2 results in January this year.
The Longboard acquisition was unpredictable, but correlating Bright Minds’ success to its larger peer was not. The hunt begins for the next Bright Minds. Stay tuned……
Beating Expectations
We have previously written about how Delcath Systems (Nasdaq: DCTH) has successfully managed investor expectations since the launch of the Hepzato Kit earlier this year. Last week, Delcath announced preliminary Q3 sales of $11.2mm, which comprised $10mm of U.S. sales. Most investors and analysts hadn’t been budgeting for Delcath to achieve $10mm of domestic sales until 4Q2024. Achieving $10mm in domestic sales triggered a 21-day exercise period for the final tranche of warrants (4.2mm @ $6/share) from the company’s March 2023 tranched financing. These warrants will bring $25mm into the treasury, which should fund Delcath through to cash-flow breakeven, estimated to occur as early as 1Q2025. Delcath’s treasury should be further bolstered with 1.6mm $10 warrants, which are now in the money and will expire on December 24, 2024. With its treasury in excellent health, Delcath can invest in indication-expanding clinical trials that can unlock Hepzato’s platform potential.
While most Delcath investors were focused on the preliminary Q3 sales figures, they may have missed a fantastic YouTube interview hosted by A Cure in Sight with UCLA interventional radiologist Dr. Siddharth Padia, focused on the Hepzato Kit. For anyone following Delcath, we highly recommend watching this video, where Dr. Padia covers his experience with Hepzato, including improvements they have made on their deployment of Hepzato at UCLA and combining it with systemic therapy. The entire video is enlightening, but the most relevant conversation around Hepzato starts at about the 32-minute mark.
Denied Biotech Theater
Earlier this month, Soleno Therapeutics (Nasdaq: SLNO) provided a regulatory update that FDA doesn’t plan to hold an Advisory Committee (Adcom) meeting for the DCCR NDA. As our readers will remember, we had been predicting an Adcom since our January 2024 note, so this decision by FDA surprised us. Amongst the investors we speak with, it seems that most feel the lack of an Adcom reflects positively on DCCR’s probability of approval on December 27. This may be so, but we think a high-profile Adcom, something we called must watch biotech theater, would have helped the equity in the near term.