Shares of diagnostic test and device developer T2 Biosystems (NASDAQ: TTOO) jumped as much as 16.1% today after a volatile week. The good news is that the company recently announced that the U.S. Food and Drug Administration cleared its T2Bacteria Panel, which is aimed at detecting the presence of sepsis-causing pathogens in blood samples.
However, the news of receiving FDA clearance for its promising blood diagnostic was paired with an announcement for a stock offering that will dilute existing shareholders by 19%. So despite the big news, shares of T2 Biosystems actually dropped that day. Today they’re simply bouncing back up, as investors have had more time to digest all of the moving parts of the business in recent days. Are investors right?
As of 2:22 p.m. EDT, the stock had settled to a 11.5% gain.
Gaining FDA clearance for the T2Bacteria Panel diagnostic test, regulated as a medical device, could be just the catalyst the company and shareholders need. The company has previously received FDA clearance for its T2Dx instrument, the platform on which its blood diagnostic test pipeline is based. The idea is to sell hospitals or medical care providers the device, then generate recurring revenue through the sale of blood diagnostic tests — but they have to receive regulatory clearance first. Now, T2 Biosystems has two FDA-cleared blood tests for sepsis: the T2Candida Panel and the T2Bacteria Panel.
Gaining regulatory approvals is important, but that’s just the first step. T2 Biosystems must now successfully market its technology platform to hospitals. There’s value to the technology package, which can identify sepsis-causing pathogens in blood samples in five hours, compared to over three days for existing methods. That could save hospitals and patients money, while also saving lives. An estimated 250,000 people die each year in the United States from bloodstream infections.
Of course, successful marketing and commercialization will require a lot of capital, which could be an obstacle for the $300 million company. So although T2 Biosystems ended the first quarter of 2018 with $29.7 million in cash, it took advantage of its recent marketing clearance to raise more funds through a share offering. On one hand, the offering will provide gross proceeds of up to $52.6 million. On the other hand, existing shareholders were diluted 19%.
Despite the recent regulatory clearance for a promising sepsis diagnostic to “complete” its technology offering to customers, T2 Biosystems remains a risky investment. The company’s financial filings for the first quarter of 2018 were prepared on the basis of a going concern, meaning auditors consider the business to be at a high risk of default or bankruptcy. While that was before the approval of the T2Bacteria Panel and share offering, investors should remember that the company is embarking on its crucial marketing and commercialization push from a shaky foundation.
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