Somaxon - Too Much Risk

Somaxon Pharmaceuticals (SOMX - Analyst Report) is running dangerously low on cash. Management exited the second quarter with $4.4 million in cash and restricted cash. Based on our financial model, Somaxon will run out of cash in July 2009. Therefore, the company plans to enter into a financing in May or June 2009.

The company noted on its first quarter conference call that this financing will be enough to fund operations through the FDA review of Silenor. Therefore, we believe management will seek to raise roughly $10 million in new capital. Given the current market value of only $9 million, we see the upcoming financing as potentially 100% dilutive.

A licensing or signing a commercialization partnership on Silenor with a specialty pharmaceutical company could be a way to raise non-dilutive cash, but at this point we do not suspect that another company will be willing to invest in Silenor prior to FDA approval.

We do not recommend owning the stock ahead of this massively dilutive cash raise coming in the next few weeks. We also believe that visibility on Silenor approval is low, and despite management's belief that they can quickly re-file for approval in May or June 2009, we are skeptical of approval in the fourth quarter.

We are also disappointed that Meg McGilley, CFO and co-founder of the company, plans to leave on May 15, 2009 ahead of what will be a pivotal next few months for the future of the company.