Shares of T2 Biosystems, a Massachusetts-based healthcare firm, have experienced a significant surge in value driven by meme stock interest. Retail ownership of T2 Biosystems has increased by more than six-fold since last month, reflecting the growing attention from individual investors. This upward trajectory is not surprising given the company’s impressive performance in the stock market, with shares rising by 110% since the beginning of August. Moreover, T2 Biosystems boasts a pipeline of four promising medical devices, some of which have received FDA Breakthrough Device Designations, further fueling investors’ optimism about its potential as a billion-dollar biotech company.
However, despite its recent success, T2 Biosystems faces a pressing funding problem that threatens its future. The company’s financial struggles are beginning to resemble those of Mullen Automotive, an electric vehicle startup that experienced significant cash burn and ultimately disappointed investors. T2 Biosystems’ operational hurdles add to the challenges it is confronting.
While investors can still profit from the volatility of T2 Biosystems’ stock and options in the short term, history has shown that highly dilutive and cash-hungry companies often face a similar fate: their stocks eventually become worthless.
T2 Biosystems shares striking similarities with Mullen Automotive, which went public in 2021 through a reverse merger. Both companies initially showed promise, with Mullen unveiling an electric crossover with ambitions of rivaling Tesla’s Model S Plaid, and T2 Biosystems announcing exciting developments related to its T2Dx and T2Candida Panel shortly after going public. However, both companies failed to deliver on their promises, leaving investors with disappointing outcomes. Mullen’s stock has lost 99.97% of its value, while T2 Biosystems has seen a 99.94% decline.
Operational inefficiencies have plagued both companies. Mullen’s board of directors lacks technical expertise, and the company has faced setbacks, such as aligning itself with fraudulent products and relying on rebranded Chinese cars. Similarly, T2 Biosystems has struggled with its T2 Magnetic Resonance platform and T2Lyme detection system, both of which have experienced underwhelming performance. Analysts predict that T2 Biosystems will remain unprofitable until at least fiscal year 2026.
In addition to operational challenges, both companies have encountered difficulties in raising funds. Struggling companies often face a downward spiral when it comes to financing. The more funding rounds they require, the greater the dilution of existing shares and the more difficult it becomes to attract new investors. Consequently, these companies may turn to convertible debt offerings as an alternative.
Convertible debt allows accredited investors to provide capital to companies without immediate dilution. In the best-case scenario, if the company’s stock price rises, the debt converts into an ownership stake at a higher valuation. However, in most cases, convertible debtholders have the incentive to convert at lower prices, obtaining a larger number of shares. T2 Biosystems’ latest financial filings reveal a significant increase in the number of shares outstanding, accompanied by a relatively small cash infusion from share issuances. This indicates that the company has been raising money at a low valuation, significantly lower than its average stock price this year.
T2 Biosystems’ funding challenges are just the beginning of its financial woes. Over the past six months, the company has burned through substantial cash from operations and will likely require another capital raise by October. Additionally, T2 Biosystems has a considerable debt of $40.6 million due by the end of 2024 and significant funding requirements for its ongoing device development. Developing a medical device typically costs around $54 million.
As a result of these factors, T2 Biosystems becomes an unattractive investment for prospective investors. The company’s term loans prioritize CRG Partners’ control over its finances, putting preferred shares in a subordinate position. Furthermore, the massive dilution of T2 Biosystems’ shares, estimated at 14 times, and tenuous financial health make it unlikely that new convertible bondholders would be enticed to invest.
Mullen Automotive has already experienced a similar death spiral scenario, with shares outstanding increasing substantially due to dilutive issuances. Given T2 Biosystems’ dire financial situation, it is possible that the company may soon find itself in a similar predicament.
