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Henrik Ekman BioTech Equity Analyst

Warrants are supportive and keeps BioTech alive but can be diluting
A warrant gives the holder (typically the management of the company) the right to buy a stock in a company at specific price on a specific date. The mix of price and dates comes in many different forms, but often the holder will have a big incentive to exercise the warrant, if the price is lower than the current price at some future point in time. This way the company can expect to receive funding in the future when issuing warrants, making it an attractive funding option for the company.

Generally, the issuance and exercise of warrants act as an important internal supplement to external funding. Warrants would typically be considered a stable source which is less dependent on risk-on and risk-off sentiment in the market. Also, many investors believe warrant programs should be an integral part of funding in high-risk companies like BioTech as it sends an important signal of confidence when the management is willing to commit substantial amount of their personal future wealth at a high risk. This would typically make external investors more inclined to invest in the company.

But when the flow of external funding is put on hold or reduced in size, the warrant program can become almost the only source of funding, and this is something you should be aware of when investing. Most investors appreciate when the management is being supportive of the company, but if the company is only able to fund itself, if the management can secure personal financing to excise their warrant program, that could increase the overall risk of the company. 

More importantly, is the risk of dilution. Depending on the size of the warrant program and the combination of the exercise price and date, there can be a potentially substantial diluting effect to the existing investors. 20-30 percent dilution is not uncommon in BioTech and Life Science companies. You can assess the potential dilution effect by 1) comparing the exercise price in the warrant program with the current stock price, and take into account the duration period of the program to assess how likely it is that the warrant will be in-the-money at the expiry date, and 2) calculate the size of the dilution by dividing the number of new shares that will be exercised relative to the current stock count.