Summary
On October 28, 2024, EyePoint Pharmaceuticals, Inc. (NASDAQ: EYPT) announced an underwritten public offering of $100 million in common stock, with an option for underwriters to purchase an additional $15 million.
The proceeds will be used to advance the clinical development of DURAVYU for wet age-related macular degeneration and diabetic macular edema, as well as for early-stage pipeline initiatives and general corporate purposes.
We initiate our coverage of EYPT with a strong sell recommendation with an implied price estimate of $8.29.
Catalyst:
On October 28, 2024, EyePoint Pharmaceuticals, Inc. (NASDAQ: EYPT), a biopharmaceutical company specializing in the development and commercialization of therapies for serious retinal diseases, announced the launch of an underwritten public offering valued at $100 million in shares of its common stock [1]. Additionally, EyePoint intends to grant the underwriters a 30-day option to purchase up to an additional $15 million in shares at the public offering price, less underwriting discounts [1]. J.P. Morgan, Citigroup, and Guggenheim Securities are serving as joint book-running managers for this offering [1].
The Company intends to use the net proceeds from the offering to advance the clinical development of DURAVYU for wet age-related macular degeneration (wet AMD) and diabetic macular edema (DME), to support its early-stage pipeline development initiatives, and for general corporate purposes [1].
Analytical Framework Outline
In our independent research, we construct a range of implied prices per common share of EYPT, factoring in two primary considerations. The first is the proposed share issuance and its dilutive effect, while the second evaluates the potential return on the equity proceeds, based on historical profitability metrics. These estimates are derived using our reference price and date, anchored to the most recent closing price before the announcement. For this analysis, the reference date is October 28, 2024, with a reference price of $12.12 per share for EYPT common stock.
Transaction Detail : Share Dilution
The transaction details are as follows. Since the press release only specifies the total dollar amount of the equity issuance, we applied an assumption similar to the treasury stock method. Under this approach, we assume that the offering’s total proceeds will be raised at the current market price of the Company’s common stock.
Additionally, in our base case analysis, we assume the underwriters will exercise their options, resulting in a more conservative approach to evaluating the potential dilutive impact.
Return on equity Proceeds
Focusing solely on the dilution effect is typically considered an aggressive approach, as it overlooks the Company's stated intent to utilize the capital raised through the equity issuance. However, in this case, it becomes a conservative approach due to the Company’s challenges in achieving consistent profitability, as reflected in its return on equity (ROE) metrics.
As noted, EYPT’s median ROE over the past 16 years has been (85.05%), with positive ROE achieved only 12.5% of the time, averaging 32% during those periods. In our base case, we assume that 85.05% of the equity proceeds will effectively be expended without yielding returns, capitalized without considering the amortization of R&D assets.
Putting it All Together
Based on our previously established reference price and date, a 10.07 million share issuance would result in an 18.92% dilution, which we assume will negatively impact the common share price by a corresponding percentage. Additionally, with an assumed ROE of negative 85.05%, the total proceeds of $115 million are likely to incur a loss of approximately $97.81 million. On an adjusted share count basis, this translates to a loss per share of $1.54, further intensifying the dilutive effect. Combining these factors yields an implied per-share estimate of $8.29, suggesting a downside potential of 27.02% based on the price as of analysis.
Other Consideration
Our base case relies on two key assumptions. First, we assume that the underwriters will exercise their options in the proposed offering, resulting in a more significant dilution than if this optionality were excluded. Second, we assume that 85.05% of the equity proceeds from the public offering will be lost, based on historical performance. While this assumption aligns with historical trends, it may prove inaccurate, as the occasional positive ROE observed in our data suggests.
Accordingly, we provide the following data table, illustrating implied price-per-share estimates across a range of ROE percentages and different cases regarding the exercise of the underwriter options.
Sources:
[1] Press Release : EyePoint Pharmaceuticals Announces Proposed Public Offering of Common Stock | EyePoint Pharmaceuticals
[2] Latest Quarterly Filing: EDGAR Filing Documents for 0000950170-24-093853
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