Editor’s note: This article was updated on Aug. 15, 2023 to correct information related to T2 Biosystems’ second-quarter report and provide new context from CEO John Sperzel.
In 2014, Massachusetts-based T2 Biosystems (NASDAQ:TTOO) went public at $11 per share. Expectations were high for the young startup. Its sepsis-detecting products targeted a $20.3 billion industry, and T2’s Magnetic Resonance Platform (T2MR) was potentially game-changing. Shares would quickly rise to a pre-split $23.
The product, however, would prove a dud. In 2020, most of T2’s revenues came from its Covid-19 detection kits. And by its 2022 annual report, the company had removed all mention of using magnetic resonance in its products.
That hasn’t stopped a new generation of investors from piling into TTOO stock. Since July, shares of the tiny biotech have risen over 250% as meme investors have singled out the firm. According to data from Fintel.io, the percentage of retail investors has increased by around 90% in the past week alone. As T2 continues to trend on social media, some speculators are even betting that shares could rise to $5 or more this year, as options trading data shows.
But investors are just as likely to get burned again once the mania cools. Though shares could rise to $1 or more in a short-term frenzy, T2 Biosystems is probably worth closer to $0… or perhaps 5 cents than anything else.
TTOO Stock: A Great Story Meets the Real World
At first glance, T2 Biosystems looks like a “no-brainer” investment. The company is a leader in detecting sepsis-causing pathogens, one of America’s most expensive causes of death. Roughly 350,000 individuals die in the U.S. from sepsis each year, costing the healthcare system $62 billion. T2 Biosystems also has four significant products in its pipeline, several of which have gained FDA Breakthrough Device designation.
Most importantly, TTOO’s shares are cheap. The stock trades for 30 cents, giving the impression of incredible upside.
To a non-biotech investor, these elements make T2 compelling beyond belief. Biotech companies are usually valued on the markets they address, and T2 Biosystems targets some abnormally large markets. The U.S. Centers for Medicare & Medicaid Services (CMS) determines drug prices primarily by the alternative of not having the therapy.
But underneath this bullishness lies three significant problems.
1. Extreme Competition in a Small Market
T2’s systems face off with tests from much larger firms. In sepsis detection, at least two other companies offer traditional blood culture-based diagnostics, including blue-chip Becton Dickinson (NYSE:BDX), an $80 billion multinational healthcare firm. Slower detection methods are also widely available from Roche (OTCMKTS:RHHBY), Danaher (NYSE:DHR) and many other well-funded companies.
Sepsis is also surprisingly difficult for any single test to detect. Hundreds of pathogens can cause the condition, and healthcare professionals often identify sepsis via signs of infection or organ damage instead. One of T2’s flagship products, for instance, can only test for six different pathogens. Together, these six pathogens cause 2 million illnesses, but less than a tenth of sepsis deaths.
In 2022, T2 Biosystems generated only $11.3 million in product revenues, spending roughly $21.1 million in direct costs alone. (R&D and overheads would add another $56 million to that figure). Revenues are also expected to fall. On Monday, the company’s management lowered their 2023 guidance from a $12 million sales midpoint to $10 million.
2. Breakthrough Devices: Not a Panacea
Then there’s T2’s Breakthrough Device designation, an often misunderstood term the Food and Drug Administration (FDA) awards.
In 2018, the FDA began converting its Expedited Access Pathway (EAP) program to the newer Breakthrough Device Designation. This voluntary program expedites the medical device review process, potentially cutting years from development periods.
But development cycles have their costs. Truncated approval schedules lead to shortened feedback timelines, making it difficult for research firms to adapt devices to new findings. The designation is also no endorsement of the product’s potential efficacy. In 2018, 71% of all device applicants were granted breakthrough designation.
That means final regulatory approval is far from guaranteed. Of the 794 Breakthrough Device and EAP designations awarded since 2015, only 67 have been approved for commercial use. That’s roughly the same approval rate that any novel medical device can expect.
Together, that means T2 Biosystems’ Breakthrough Device designations are not particularly notable. Its T2Lyme Panel, which received the fast-track designation in July 2022, was one of 10 separate winners of the LymeX Diagnostics Prize.
3. Shares Outstanding: The Next Mullen?
Finally, T2 Biosystems has a share dilution problem. On July 3, the company entered into a convertible stock deal with CRG Partners. In exchange for $10 million in debt cancellation, T2’s management gave the financing firm 48.3 million shares of common stock and another 93.3 million of convertible stock equivalent.
It’s one of the most dilutive share issuances in recent memory. By giving away 141.6 million shares of new stock at a 7-cent-per-share valuation, T2 Biosystems increased its share count by around 550% for a sum that would barely cover three months of operating expenses. A similar process caused Mullen Automotive (NASDAQ:MULN) to see its share count rise over 4,500% since 2021.
That’s what makes convertible fundraising also known as “death spiral” financing. Companies with significant convertible stock outstanding become less attractive to other institutional investors, since every new deal increases share dilution risk. That means the issuing company needs to offer more generous terms to attract new investors, which dilutes existing shareholders even further, and so on. It’s a vicious cycle that can quickly get out of hand. Firms like Mullen now routinely offer 185% “bonus shares” to existing institutional investors during capital raises. And T2’s management will quickly find themselves in the same situation once cash runs short again.
What’s TTOO Stock Worth?
T2 Biosystems laid off 30% of its workforce in May as Covid-19-era revenues and BARDA funding dried up and the company sought to preserve cash. At the end of Q2 the firm only had $16.1 million cash left on hand, and had just burned through $12.9 million the previous quarter.
At the time, management believed they could restructure or sell their way out of the problem.
“In an effort to maximize value, we have engaged an advisory firm to explore all potential strategic alternatives. In addition, to preserve capital, decrease quarterly cash usage and position the Company to explore strategic alternatives, we have simultaneously implemented a restructuring program.”
But the following three months have shown that T2 Biosystems may be in deeper trouble. On Monday, the firm announced that revenues declined 67% due to a reduction in BARDA contribution. The company’s recent share price decline to 7 cents also showed that no competitor found T2 an attractive acquisition, even as its market capitalization bordered on zero. (Including debts, the company was worth $60 million in July, based on a share price of 18 cents and outstanding shares of 333,580,010).
In a sense, investors shouldn’t be surprised. T2 Biosystems is up against much better-funded competitors and has an accumulated deficit of $558.5 million. The company also may have too little cash; one study shows that the average medical device costs $54 million to develop — more than 3X the amount of money T2 had as of Q2. Even if the firm manages to successfully develop these devices for much less, its limited cash could make it an uphill battle to scale production without a significant capital infusion.
But meme investors could do plenty of mayhem in the meantime. In a world where zero-revenue meme stocks can become worth $700 million, all it takes is a little momentum for short sellers to lose everything.
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As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
