Why Onconova Therapeutics (ONTX) Stock Is Up Sharply

Onconova Therapeutics (ONTX) stock, which fell over 21 percent on May 20, was up over 1,400 percent on May 21. What happened to ONTX stock and why it is up sharply?

Onconova Therapeutics is a clinical-stage biopharmaceutical company that's discovering and developing novel products for cancer patients. It isn't unusual for clinical-stage companies to see massive volatility around the release of trial results or news of drug approval.

However, the massive volatility that we’re seeing in Onconova Therapeutics stock isn't due to clinical trial news. The volatility is due to a 1-for-15 reverse stock split. After the split, the total number of outstanding shares of ONTX will fall from around 236.714 million shares to only about 15.781 million.

A reverse split is the opposite of a stock split where the company splits its shares to increase the liquidity. In 2020, both Apple and Tesla split their shares after the sharp rally. Fundamentally, the stock split doesn't change anything and the EPS also comes down in the same ratio as the stock split.

However, where it helps is by increasing the liquidity. A lot of retail investors have a tendency to trade in stocks that are priced lower in dollar terms. A lower-priced stock in absolute dollar terms doesn't necessarily mean that it's cheap or undervalued. Valuation is independent of the absolute stock price.

After the stock split, the stock falls in conjunction with the split ratio. So, a stock that has been split 2-for-1 would fall by around half on the day it trades after the split completion.

In contrast, a company does a reverse stock split when its stock falls too low and it faces the risk of delisting. According to the NYSE listing rules, a stock is subject to delisting if the average price in any 30 consecutive trading day is below $1.

Before the split, ONTX stock was trading below $1 and could have been a candidate for delisting. ONTX stock is up sharply on May 21 in accordance with the reverse merger ratio. All else being equal, one would expect the stock to rise 1,500 percent after the reverse merger but we usually don’t get that in the real world as the day’s usual price action also plays out along with the corporate action.

Earlier this week, Onconova Therapeutics released its earnings for the first quarter of 2021 and posted a net loss of $4.7 million compared to a net loss of $5.1 million in the same period in 2020. The company’s R&D expense fell from $3.4 million to $1.9 million over the period.

Clinical stage biopharma companies spend heavily on R&D and very often it tends to be the biggest expense for them. The company attributed lower R&D expenses in the first quarter of 2021 to “lower expenses for the oral rigosertib combination program and the completed Phase 3 INSPIRE study in the 2021 period.”

The company had cash and cash equivalents of $48 million at the end of March, which management thinks can fund the cash burn for the next 18 months. Clinical stage companies burn a lot of cash and have to access the capital markets frequently to bridge the cash burn.