The market is mixed with a positive bias on Thursday morning. Oil is lower, and there is some rotational action into small caps, which are trading up 1.45%. The Roundhill Magnificent Seven ETF (MAGS) continues under heavy pressure and has broken below its 200-day simple moving average. The character shift in the indices is being absorbed by the rotation rather than spreading broadly.
The most interesting headline of the morning was President Trump’s Truth Social post saying the U.S. will take Iran’s Kharg Island and “assume total control of their Oil and Gas Markets.” Kharg Island handles roughly 90% of Iran’s oil exports, so the implications are significant. The market appears to like the framing as a potential resolution path even though execution is unlikely to be fast or easy. Oil is down slightly on the news.
I have been adding a couple of names this morning. Precigen (PGEN), one of my recent buys, is bouncing back over 10% on Thursday and I’m looking for more entries. The action I am seeing in my biotechnology names is the kind of relative strength I like to see, and it offsets my concerns about the broader market.
Why Xeris Is a Core Holding
If you have been reading my columns for a while then you know that Xeris Biopharma Holdings (XERS) is one of my favorite small biotechnology names. I have been following it for years and it is one of the larger positions I hold for clients at HammerHead Financial Strategies. I know the fundamentals well, and that gives me confidence in the position.
On Thursday morning, Xeris announced an exchange agreement with certain holders of its 8.00% convertible senior notes due 2028. The company will retire approximately $23 million aggregate principal amount of the notes in exchange for approximately $23 million in cash and a number of shares of common stock determined by the volume-weighted average price over a 21 trading-day period beginning June 11. Morgan Stanley (MS) is the placement agent, which is a signal that XERS is being treated as a serious company by a heavy hitter on the institutional side.
The corporate finance behind the deal is what makes it interesting. The 2028 notes were convertible and deep in the money. If left alone, they would have converted into roughly 7.5 million shares. By settling them now for cash plus stock, Xeris issues only about 4.6 million shares, taking about 2.9 million shares of dilution off the table while eliminating about $1.84 million in annual interest expense. The cash cost is $23 million plus about $31 million in stock, which gets recorded as a mostly non-cash loss on extinguishment in the third quarter when the deal closes.
The signal is what matters more than the math. Most small biotechnology companies cannot do a deal like this because they lack the cash. Xeris has more than enough cash for operations and to fund Phase 3 development of XP-8121, its once-weekly levothyroxine candidate aimed at a $1 billion market. Buying back convertible debt for cash and a smaller share count tells me management believes the stock will be worth significantly more in the future and wants to reduce dilution and interest expense ahead of that. That is the kind of move that signals confidence in the business trajectory, and it is why I am looking to increase my position further.
In a market like we have now, it is more important than usual to understand fundamentals so that you can take advantage of mispricing that may result from higher levels of volatility. I’m expecting some bumpy action in the days ahead but that is an opportunity and not something to fear.
At the time of publication, DePorre was long XERS and PGEN.