Faron Pharmaceuticals is a Nordic biotechnology company listed on First North Helsinki and the AIM market in London. The company develops immuno-oncology therapies, with bexmarilimab as its lead asset, and is preparing to advance the program into Phase II and Phase III development. Faron is currently undertaking a share issue.

This article provides background on the investigations concerning Faron by the Finnish Financial Supervisory Authority. In addition, it evaluates the rights issue from a financial perspective.

The article is divided into five chapters as follows:

Chapter 1. The Investigations

Chapter 2. The Rights Issue

Chapter 3. Comparison to the 2024 Open Offer

Chapter 4. Rights Issue Terms

Chapter 5. Closing Remarks

Chapter 1. The Investigations

In connection with the 2026 Rights Offering, which is discussed further in Chapters 2, 3 and 4, Faron disclosed that the Disciplinary Committee of Nasdaq Helsinki had initiated proceedings concerning the company. However, Faron has also been subject to two separate cases by the Finnish Financial Supervisory Authority (FIN-FSA). Faron has not disclosed these latter cases to the market and disclosed the Disciplinary Committee proceeding only in the prospectus relating to the Rights Issue, which was approved by the FIN-FSA. This chapter sets out the information that, in our view, should be made known to the public and offers more information on the Disciplinary Committee proceeding.

Nasdaq Helsinki Issue

Faron’s common stock is traded on the First North Growth Market Finland operated by Nasdaq Helsinki, which is subject to the supervision of the Finnish Financial Supervisory Authority. Nasdaq Helsinki Surveillance is responsible for monitoring whether issuers listed on the marketplace comply with the applicable rules and regulations. The Surveillance function may initiate an investigation if it determines that a company may have breached those rules. If an investigation results in the conclusion that a company has violated the rules and the company is unable to provide an acceptable explanation for its conduct, the Surveillance function may issue a non-public reprimand. However, if the breach is considered material and the explanation inadequate, the matter may be referred to the Disciplinary Committee.

The Disciplinary Committee is an independent body. It may base its decision on the material gathered during the Surveillance investigation, but it may also request additional evidence from the company concerned. If the Disciplinary Committee decides to impose a sanction, the sanction may range from a warning to delisting.

It remains unclear which specific incident or disclosure the proceedings concerning Faron relate to, but the company has stated that the matter concerns allegedly misleading information presented in an interview and the adequacy of its corporate governance arrangements. We have repeatedly noted that certain public comments have appeared materially disconnected from the underlying facts. For further discussion, please refer to our earlier articles on Faron Pharmaceuticals published at rosegarden.capital.

The matter has already been referred to the Disciplinary Committee and, accordingly, there is a meaningful possibility that the Committee will impose a sanction. The Committee’s decision is final and not subject to appeal. In our assessment, the most likely outcome is a monetary fine. The potential range of such a fine is not specified in the First North Helsinki rulebook. However, on the main market, fines range from €10,000 to €500,000, and we believe any potential fine would likely fall within a comparable range. The financial significance of a possible sanction is therefore limited. Nevertheless, the matter highlights that the company’s public statements may at times be misaligned with the underlying circumstances and should therefore be interpreted with particular caution. A decision, together with the publication of further details, is expected in spring 2026.

Finnish Financial Supervisory Authority Case No. 1

Faron has been involved in two FIN-FSA cases, both of which appear to remain ongoing. The first is an investigation concerning possible market abuse in Faron’s shares. The suspected conduct appears to be connected to the public share issue carried out in 2024.

The details of the investigation are not publicly available, as the matter remains ongoing and the latest known developments date to early 2026. Based on the information available to us, the matter concerns the alleged misuse of inside information, which is prohibited under Chapter 51, Sections 1 and 2 of the Finnish Penal Code. A party found guilty may be subject to a fine or a term of imprisonment of up to four years.

It is not known who is the subject of the investigation. We therefore refrain from making conjectures regarding the party concerned or the implications of the matter for the company and the ongoing rights issue.

The misuse of inside information constitutes a serious violation of market integrity. It disadvantages ordinary investors who do not have access to non-public information. As a result, such conduct may reduce returns for law-abiding investors, increase transaction costs, and impair the overall efficiency and credibility of financial markets.

Finnish Financial Supervisory Authority Case No. 2

The second case dates back to late 2025 and, based on the information available to us, appears to remain ongoing. In this matter, the FIN-FSA has requested clarification regarding the market sounding process conducted by Faron. Market sounding refers to the process of assessing potential investors’ interest in a contemplated transaction and the terms associated with it. It is typically conducted in advance of transactions such as share issues in order to support the appropriate structuring of the terms. Market sounding is subject to extensive regulation under the EU Market Abuse Regulation (MAR).

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Chapter 2. The Rights Issue

On 9 February, Faron announced that it is seeking to raise gross proceeds of €40 million through a rights issue. This chapter examines the rights issue and the background to the transaction.

Background

Faron’s cash position amounted to €12.3 million at year-end 2025, which was sufficient to cover its financial obligations until the second half of 2026, but insufficient to fund further clinical studies. To advance its lead asset, bexmarilimab, into Phase III development, Faron had disclosed that it was pursuing a licensing agreement under which a licensee would assume some or all of the costs of further studies and pay the licensor royalties, an upfront payment, and milestone payments in exchange for the commercial rights to the drug.

We have long argued that such a licensing agreement was unlikely to materialize for several reasons. For further discussion of the matter, please refer to our earlier article here. In particular, the predatory financing arrangement with Heights Capital Management (HCM) materially weakened Faron’s negotiating position. For further analysis of the HCM financing arrangement, please refer to our earlier articles at rosegarden.capital.

Chief Executive Officer Dr. Jalkanen has argued that the reason such a partnership did not materialize was the failure of a competitor’s trial. From an external perspective, it is difficult to assess the accuracy of Dr. Jalkanen’s comments, but they appear unconvincing. The share price has declined by more than 70% since the company announced the rights issue, which suggests that virtually any alternative non-dilutive arrangement, such as a licensing agreement, would likely have been in the best interests of shareholders. In our view, the chosen course of action has most likely reflected the company’s weak negotiating position and the misalignment between management’s interests and those of shareholders. Faron is effectively a family-controlled business, which suggests that its primary objective is not necessarily the maximization of shareholder value, but rather the independent advancement of a potential cancer treatment discovered by the family.

Impact on the Pipeline

Due to the absence of a partner, the company cannot afford to conduct the extensive Phase II/III study it had previously envisaged.

In order to reduce costs, the company has opted for a separate blinded Phase II study with a more limited patient population. Contingent on strong results, such a trial could enable the company to out-license the project before Phase III. We have long argued that a controlled randomized trial is effectively a prerequisite for a licensing transaction with a large pharmaceutical company. Accordingly, the successful completion of the planned trial could enable Faron to out-license the project following the readout.

The company expects to commence the study in the second half of 2026. The timeline, especially the timing of the readout, appears ambitious in our view.

The rights issue is fully secured. Accordingly, the company’s operational pathway remains unchanged regardless of the subscription rate. However, the proceeds are not sufficient to fund the company through the trial readout, whether that occurs in the latter part of the second half of 2027 or, as we consider more likely, at a later date.

Runway

The rights issue will provide the company with gross proceeds of €40.1 million and net proceeds of €32.8 million. These proceeds are sufficient to fund the company until the second half of 2027.

The company addresses this funding horizon by indicating the possibility of further directed share issues under the existing authorization granted at the 2025 annual general meeting, or AGM. In addition, as the company will hold its 2026 AGM in May, we expect the board to propose a further authorization for the issuance of approximately 50 million new shares. This authorization would likely be required primarily to facilitate the issuance of additional shares and special rights in connection with the HCM arrangement, under which the current amount of special rights appears insufficient in light of the significantly lower share price. Moreover, the company’s option program is likely to require adjustment as a result of dilution.

The remaining authorization for 19 million shares granted at the 2025 AGM remains available until 30 June 2026. Should the company fail to attract investor interest in a directed share issue before that date, a broader authorization would likely be necessary. In our view, a directed issue would be superior compared to another rights issue prior to the readout.

The company has not introduced any cost reduction measures in connection with the rights issue. In our view, management should consider reducing costs wherever possible, given the apparently high cost of raising capital through both equity offerings and debt financing.

Timeline

The subscription period runs until 2 April on First North Helsinki and until 31 May on the AIM market in London. The final result of the rights issue will be announced on 9 April, after which the guarantors will be allocated their respective shares.

Chapter 3. Comparison with the 2024 Open Offer

In 2024, Faron was in a broadly similar position, with a cash balance insufficient to finance Phase II clinical studies. This chapter compares the 2024 open offer with the 2026 rights issue across relevant dimensions, including valuation.

Difference Between an Open Offer and a Rights Issue

From a technical perspective, an open offer and a rights issue differ fundamentally. An open offer transfers value from existing shareholders to new investors if the offer price is below the market price. By contrast, a rights issue has no effect on equity value attributable to each share if transaction costs are disregarded. This holds irrespective of whether an investor is willing to commit additional capital, provided that the subscription rights are tradable.

In practice, however, the share price often declines toward the offer price, which renders the subscription rights largely worthless. One possible explanation is that subscription rights or subscription options require cash to be exercised, which can influence market dynamics in actual trading conditions. At the same time, rights issues are rarely independent of underlying business developments. In Faron’s case, the announcement of the rights issue ultimately made it clear that a licensing transaction was unattainable.

Comparing the Financial Position

Notably, Faron’s position with respect to the path toward market approval remains broadly similar. In 2024, BEXMAB02 was considered to be the study preceding a registrational Phase III trial. The upcoming Phase II study is now expected to serve a similar role. Accordingly, the estimated time to potential approval is broadly comparable, which allows for a meaningful like-for-like comparison. Moreover, the target market remains broadly similar, especially after taking into account the substantial uncertainty inherent in forecasting drug sales.

The more significant differences relate to the capital structure and the contingent claims on Faron’s equity, most notably its debt financing instruments. In 2024, Faron had an outstanding loan from IPF Partners. The loan was amortized through cash payments, but it was also the principal reason for the 2024 open offer, as the indenture required cash covenants that Faron ultimately breached. In early 2025, the loan was repaid using proceeds from the HCM loan agreement, which has been discussed extensively in our earlier articles available at rosegarden.capital. The early repayment of the IPF loan resulted in early repayment fees of €1.1 million, while the warrants issued to IPF as a sweetener remained outstanding. The terms of the HCM loan are highly predatory and are typically encountered only in financially distressed companies. Accordingly, the underlying rationale for the switch to HCM remains unclear, but the implications for investors have now become fully apparent. As of 18 March 2026, the remaining principal amount of the HCM bonds was €17.1 million and their fair value was €23 million following the conversion price reset.

Comparing the Offers

The key parameters of the two offerings are set out below. Guarantee commitments are fee-based commitments, typically provided by external investors. Subscription commitments are unpaid commitments and are typically provided by existing shareholders. In addition to the guarantee and subscription commitments listed below for the 2026 Rights Issue, the transaction also includes cornerstone investments amounting to €4.7 million.

Most notably, the offer price has halved. In practical terms, this indicates that the company has been unable to generate shareholder value over the past two years.

Moreover, the costs associated with the rights issue are materially higher. In 2024, a rights issue was considered, but it proved infeasible due to time constraints. In the current situation, there is no comparable immediate timing pressure, which has enabled the company to pursue a more expensive and time-consuming rights issue instead. Although issue-related costs have increased from €2.9 million to €4.4 million, we consider the rights issue to be a fairer alternative for shareholders.

Possibly due to the financing pressure and time constraints that were evident in 2024, the company was able to secure only a limited number of underwriters. In 2026, by contrast, the company has fully secured the issue, thereby eliminating execution risk related to the outcome.

Subscription commitments are lower than in 2024. The principal reason is that the company’s largest shareholder, Mr. Syrjälä, has not indicated an intention to subscribe for his pro rata share. The subscription commitments relating to the 2026 rights issue are discussed in greater detail in Chapter 4.

Market Terms

The theoretical ex-rights price (TERP) for the 2024 issue amounted to €1.95. Accordingly, the issue price of €1 implied a discount of 49% to TERP. However, in both the 2024 open offer and the 2026 rights issue, the offer announcement contained a substantial amount of additional information, both implicitly and explicitly, that affected expectations regarding future cash flows. TERP should therefore be interpreted as an illustrative measure.

Similarly, in the 2026 rights issue, the preceding share price was €1.80, corresponding to a TERP of €1.22 and a discount to TERP of 59%. These figures reflect transaction expenses and the increase in the valuation of the outstanding warrants and convertible instruments. However, to derive a more economically meaningful TERP, one must also estimate the decline in Enterprise Value (EV) resulting from the delay, the revised trial plans, and the reduced likelihood of a licensing agreement.

Figure 6 shows TERP and the discount to TERP on the right axis as a function of the implied loss in enterprise value (EV). If the implied loss is assumed to exceed €144 million, the offering would be priced at a premium to TERP.

For a more accurate comparison, it is useful to examine the pre-money and post-money market valuations of both market capitalization and enterprise value.

For the 2024 open offer, the pre-money market capitalization amounted to €70 million and enterprise value to €60 million. For the 2026 Rights Issue, the pre-money market capitalization at the issue price is €60 million. This corresponds to an enterprise value of €72 million when the convertible instruments are measured at fair value. In broad terms, the two offerings are priced at broadly similar levels.

Chapter 4. Rights Issue Terms

This chapter examines the terms of the rights issue.

Subscription and Anchor Commitments

The rights issue is fully covered through subscription commitments, anchor commitments, and guarantee commitments.

Most notably, the company’s largest shareholder, Mr. Syrjälä, has not committed to subscribing for his pro rata share. As a result, his ownership interest in the company will be materially diluted unless he subscribes for an amount exceeding his existing commitment. We consider that outcome unlikely. Had he intended to subscribe for a meaningful allocation, he could have provided such a commitment, thereby reducing the cash compensation payable to external guarantors and effectively supporting the value of his existing ownership interest. Alternatively, he could have provided a subscription guarantee in exchange for a fee.

Commitments from Faron’s board and management team are limited. Only the Chair of the Board, Mr. Pätsi, has provided subscription commitments and anchor commitments.

In addition, Ms. Jalkanen, the co-founder of the company, has committed to subscribing for 100,000 shares, which is materially below her respective pro rata share.

No executives have indicated an intention to subscribe for shares.

In addition to subscription commitments, several new investors have expressed an interest in subscribing for shares through anchor commitments totaling €7 million. The distinction between subscription commitments and anchor commitments is that anchor commitments are used to subscribe for shares that would otherwise remain unsubscribed and are therefore allocated without subscription rights.

Guarantee Commitments

After taking into account the anchor commitments and subscription commitments, the remaining 70.65% of the rights issue is covered by guarantee commitments. A total fee of €2.9 million will be paid to the guarantors, implying an average guarantee fee of approximately 10%. However, we believe that HCM will receive a fee of 11% in light of its role, while the other guarantors will receive 8%. The fee will be paid in cash.

Below, we introduce the guarantors and provide an assessment of whether each entity should be regarded as a long-term holder or a short-term holder. We classify an investor as short term if, in our view, it is likely to divest any allocated shares within 0 to 6 months. Investors that do not fall within this category are classified as long term.

1. HCM

   Commitment: 39 million shares

In addition to the convertible bonds, HCM has committed to subscribe for a substantial number of shares. Owing to the predatory nature of the loan agreement, HCM effectively has decisive influence over Faron’s financing alternatives. HCM is largely insulated from changes in Faron’s share price arising from equity issuances, because the conversion price is set by reference to the offering price. Accordingly, the offer price is ultimately determined by HCM. We therefore regard HCM as a short-term investor that is likely to divest any allocated shares as soon as practicable. HCM has agreed not to accelerate any convertible repayments for a period of 60 days following the rights issue. However, the guarantee commitment is not subject to transfer restrictions.

2. Pentwater Capital

   Commitment: 6 million shares

Pentwater Capital is a hedge fund and is, in our view, likely to divest any allocation promptly after the rights issue.

3. Anavio Capital Partners

   Commitment: 3 million shares

Anavio is an investment firm that frequently provides financing support as a guarantor and is therefore likely to divest any allocated shares rapidly.

4. Fenja Capital

   Commitment: 2 million shares

Fenja Capital is a Swedish investment firm that frequently participates in rights issues as a guarantor and is known for liquidating its allocation promptly.

In addition, there are six further guarantors with smaller allocations, which we also consider likely to be short-term investors. Accordingly, we believe that all guarantors in the transaction are short-term investors and are therefore likely to liquidate any allocated shares within a relatively short period.

Allocation

Shares are allocated first to those who have subscribed for shares with subscription rights. Second, shares are allocated to those who have subscribed for shares both with and without subscription rights. Third, shares are allocated to those who have subscribed for shares without subscription rights. Fourth, shares are allocated to anchor investors and finally to guarantors.

Accordingly, any subscriptions made in excess of committed amounts are, in effect, allocated at the expense of the guarantors. This means that the price at which guarantors can sell their shares while still generating a profit is materially below the issue price and depends solely on the number of shares subscribed for by other investors.

Effective Issue Price for Guarantors

The guarantors will receive total cash compensation of €2.9 million. This compensation is payable irrespective of the number of shares ultimately allocated to them. We believe that HCM’s compensation differs from that of the other guarantors. However, the following figures are based on the simplifying assumption that compensation is distributed evenly among all guarantors.

As shown in Figure 7, the effective cost to guarantors is materially below the actual subscription price. The horizontal axis shows the subscription rate excluding guarantee commitments. Accordingly, a subscription rate of 71% refers to a scenario in which 29% of the issue is allocated to guarantors, corresponding to an allocation worth approximately €12 million. In that case, the guarantors break even provided that they are able to divest the shares at a price of €0.39 or above. If the subscription rate exceeds 71%, the effective price declines rapidly, although the actual allocation to guarantors also decreases. At the other end of the range, 29% refers to a situation in which no subscriptions are made beyond the subscription commitments and anchor commitments.

Result

We estimate that approximately 50% to 80% of the rights issue will be subscribed for, both with and without subscription rights, including the subscription commitments and anchor commitments. This would imply an allocation to guarantors of approximately 20% to 50% of the issue. On that basis, the guarantors’ effective subscription price would be approximately €0.32 to €0.43, with an allocation of roughly 16 million to 40 million shares. Accordingly, a higher overall subscription rate would imply lower selling pressure on the stock.

Chapter 5. Closing Remarks

Thank you for reading. We wish our readers continued success this spring. We also encourage you to appreciate the world and the people around you.

In forthcoming articles, we will examine the total cost of the HCM transaction for Faron and its shareholders in order to illustrate, once again, how difficult it is to recover from this type of financing error without a detrimental and dilutive equity injection. Furthermore, we will assess the outcome of the rights issue and its implications for the market. In addition, we will continue to report on developments relating to the Disciplinary Committee’s decision and the Finnish Financial Supervisory Authority’s investigation into suspected market abuse, as well as related matters.

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The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance. Although every effort is made to ensure accuracy at the time of publication, errors or omissions may occur. Always corroborate key facts with multiple reputable sources and, where feasible, trace assertions back to the original source material. References to third-party content are provided solely for convenience and do not imply endorsement, and no responsibility is assumed for their completeness, reliability, or timeliness. The topics covered are not necessarily exhaustive.

Faron Pharmaceuticals is a Nordic biotechnology company listed on First North Helsinki and on the AIM market in London. The company develops immuno-oncology therapies with bexmarilimab as the lead asset and is preparing for Phase II/III. Faron is currently in the process commencing a share issue.

This article offers preliminary observations on the proposed share issue and the underlying rationale.

The Proposed Share Issue

On February 9, the company announced plans to raise approximately €40 million through a share issue. The proceeds are intended to fund the dose-optimization phase of the forthcoming phase II/III BEXMAB02 trial.

Liquidity Position

As of February 9, the company held a cash position of approximately €6 million, which is sufficient to fund operations through the end of the second quarter of 2026. However, the initiation of the BEXMAB02 trial requires upfront investments that the company was not in a position to make without additional funding.

Furthermore, the third tranche of the HCM bond, which was discussed in more detail in our earlier issues, included terms that made it unavailable to the company.

Timeline

The proposed share issue exceeds the currently available authorisation. Accordingly, the company has convened an extraordinary general meeting, in order to seek authorisation to issue up to a further 80 million shares. We expect shareholders to approve the proposal.

The company stated that the share issue is expected to commence and conclude during the first quarter of 2026. If this timetable holds, the company can secure the proceeds before running out of cash and thereby avoid having to rely on expensive bridge financing.

If the company succeeds in raising sufficient capital, we expect the BEXMAB02 trial to commence in late third quarter of 2026, with the first patient recruited by the end of 2026. This would indicate a delay of approximately one year relative to the most recent timeline communicated by the company.

The Reason Behind The Share Issue

The decision to seek equity financing was largely expected given the information previously available. In this chapter, we briefly discuss the relevant factors. For a more detailed discussion, please refer to our earlier issues available at rosegarden.capital.

Faron Assumed the Sponsor Role for the Upcoming Trial

In September 2026, Faron announced three full time positions simultaneously, which appeared to be closely connected to the upcoming BEXMAB02 trial. These vacancies suggested that Faron required additional talent over an extended period. This indicated that Faron had chosen to sponsor at least the initial part of the upcoming trial.

The sponsor of a clinical trial is the responsible party. If a biotechnology company seeks a Big Pharma partner to advance its clinical pipeline, the partner generally assumes the sponsor role for the trial. This is consistent with the underlying nature of a licensing agreement. Situations in which a Big Pharma partner licenses a project from a smaller company and still defers the sponsor role are highly unorthodox. For more information on this topic, please refer to our earlier issue, which discussed licensing deals in more detail.

Faron Has Relied on Predatory Funding Arrangements

A significant share of Faron’s financing has come from Heights Capital Management (HCM), an entity that is widely known to employ predatory lending practices. In such arrangements, it may take advantage of financially distressed companies, such as Faron, by issuing debt instruments that are often referred as junk equity in the academic literature. The use of these unfavourable financing instruments has signalled to potential partners that Faron struggles to secure funding on reasonable terms. This has contributed to a weak negotiating position in licensing discussions.

Faron’s Organisation and Cost Structure Is Very Large for Early Stage Development

Faron’s headcount exceeds 30, which is a high number for a Nordic biotechnology company with a history of financial strain. In addition, Faron has continued to hire experienced professionals who command high salaries. If Faron had outlicensed its lead project at this stage, it is clear that the cost structure would have required adjustment. However, because Faron now aims to secure a licensing deal only after the first controlled readout in 2027, the current organisational structure appears suitable for fulfilling the responsibilities of the sponsor of a pivotal Phase II/III study. It is rare for a company to pursue transactions that would effectively render its existing workforce redundant. This is particularly evident in single project family businesses.

CFO Out

Faron’s CFO, Mr Wichmann, retired in early December 2025, during a period that the company had previously led investors to regard as favourable for partnering discussions. This suggested that any such discussions had either concluded without an agreement or had not taken place in a substantive manner.

In our earlier issue, we considered the possibility that Mr Wichmann had in fact been dismissed. The subsequent announcement suggests that this may have been the case.

Expectations For The Key Parameters

Outstanding HCM Bonds

As of February 9, principal of €17.5 million remains outstanding under the convertible instruments issued pursuant to the HCM loan agreement.

This arrangement casts a shadow over the rights issue, as payments of approximately €1.5 million are scheduled every other month. Given the expected decline in market capitalisation, these payments represent an increasingly large share of trading volume, which may further depress the share price.

We expect the company to be in discussions with the lender regarding the possibility of converting the remaining debt into equity in conjunction with the share issue. This would allow the company to start from a clean slate following the issue. If this occurs, we expect part of the issue proceeds to be set off against the debt, resulting in lower cash proceeds. Furthermore, this would likely lead to a lower subscription price and a fee payable to HCM amounting to approximately 10% to 15% of the principal. This corresponds to €1.75 million to €2.625 million.

Available Authorization To Issue Shares

If the EGM approves the authorisation to issue 80 million shares, an additional authorisation for approximately 15 million shares, stemming from the 2025 AGM, would remain in place alongside the 80 million shares. This would result in a total authorisation of approximately 95 million shares. The proposed authorisation of 80 million shares is relatively limited, which suggests that further issuance may be authorised at the annual general meeting held later in the spring. This is because the special rights attached to the convertible bonds are likely to be insufficient in light of the expected decline in the share price.

However, as the next scheduled payments are due in April 2026, the company can wait before issuing additional special rights. If HCM decides to accelerate any payments, the proposed authorisation may prove insufficient. This could require the board to propose a larger authorisation before the EGM. Furthermore, if HCM acts after the EGM, or if the company’s market price declines, the company may be forced to convene an additional EGM to secure authorisation to issue more shares. Alternatively, the company may need to raise bridge financing in order to fund cash payments in the event of accelerated payments.

The situation is risky for Faron given the predatory nature of the HCM loan agreement. We will provide a more detailed view of the share issue once the final terms are released and the EGM has concluded.

Expenses

We expect expenses to be approximately €3.5 million before accounting for any potential compensation payable to the guarantors of the issue. This figure is relatively high as a result of the dual listing, which is expected to complicate the rights issue.

Furthermore, we expect a guarantee fee of 12.5% to be paid to the guarantors of the issue. We expect the guaranteed amount to be approximately €12 million, which would result in a fee of €1.5 million. This would bring total expenses to approximately €5 million.

The Subscription Price

In theory, the subscription price in the issue is not relevant, as the subscription right is attached to the existing shares. However, in practice, given the large amount of capital the company is seeking and the difficult market environment, there is a substantial risk that the issue will not be fully subscribed. In that case, the subscription rights would be worthless.

Generally, rights issues are carried out at a discount of approximately 30% to 40% relative to the theoretical ex rights price, TERP. However, in Faron’s case, we believe the discount may be materially higher, as failure to raise the targeted amount could lead to disruptions to the company’s operational objectives. Accordingly, we expect the discount to be approximately 40% to 50%.

The final closing price prior to the announcement of the issue was €1.89. Using a TERP discount of 45% and total expenses of €5 million, we arrive at a subscription price of €0.86. This can be considered the upper end of the plausible range of subscription prices. The lower end can be approximated by considering the total number of shares available for issuance and the targeted gross proceeds. Therefore, we forecast the subscription price to be between €0.4 and €0.8, which would correspond to a TERP discount of 48% to 66%. In our next article, we will provide a projection of the outcome of the rights issue.

Thank you for reading. We will publish a detailed article in March that considers all aspects of the upcoming transaction. Please consider subscribing in order to be among the first to gain access.

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Until March, you may be interested in reading some of our earlier articles on Faron. Below are some articles that you may find useful, presented in chronological order.

Jun 24, 2025 — Faron Pharmaceuticals — A Share Issue Would Drive Value

Jul 24, 2025 — Faron Pharmaceuticals — Transforming Value From Shareholders to HCM

Aug 19, 2025 — Faron Pharmaceuticals — Navigating the Financing Choices to Phase III

Oct 06, 2025 — Faron Pharmaceuticals — Ahead of Critical Decisions

Dec 15, 2025 — Faron Pharmaceuticals — Death Spiral Deepens

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance. Although every effort is made to ensure accuracy at the time of publication, errors or omissions may occur. Always corroborate key facts with multiple reputable sources and, where feasible, trace assertions back to the original source material. References to third-party content are provided solely for convenience and do not imply endorsement, and no responsibility is assumed for their completeness, reliability, or timeliness. The topics covered are not neccessarily exhaustive.

Faron Pharmaceuticals is a Nordic biotechnology company listed on First North Helsinki and on the AIM market in London. The company develops immuno-oncology therapies with bexmarilimab as the lead asset and is preparing for Phase II/III. Faron is currently in the process of seeking financing to advance its clinical programs.

In this article, we take a look at Faron’s year 2025 and its positioning for 2026 and several other key aspects. The article is divided into six chapters as follows:

Chapter 1: Where Is Faron & What we know

Chapter 2: HCM Bonds & Junk Equity

Chapter 3: HCM Bond Tranches & Valuations

Chapter 4: Licensing Deals

Chapter 5: What Analysts Get Wrong

Chapter 6: Merry Christmas

CHAPTER 1: Where Is Faron & What We Know

Liquidity

Before announcing the issuance of the second tranche HCM bond, Faron’s cash position stood at slightly over €2 million, sufficient to fund the company for approximately six weeks.

The Second Tranche HCM Bond provides the company with cash proceeds of €9.25 million, sufficient to extend the financial runway by approximately 4–5 months, until May 2026.

The Second Tranche HCM Bond was the only secured financing instrument. Following its issuance, Faron’s ability to fund operations over the next twelve months remains unclear, and there is no assurance that the company can identify solutions that address the liquidity gap in a value preserving manner. The HCM agreement includes a Third Tranche Bond which, however, contains terms that Faron must satisfy to retain the right to issue it through a unilateral decision. At present, it is unlikely that Faron will be able to satisfy the terms. Please refer to chapter three for further discussion of the topic.

PR-campaign in August

On August 2nd, Faron covered the econd scheduled First Tranche HCM Bond instalment in cash, amounting to approximately €1 million. At the time, Faron held approximately €11.5 million in cash, and thus paid HCM roughly 9% of total available liquidity without any clearly articulated rationale.

At the time, the most credible explanation for the cash amortization was that the company was closing in on a partnership agreement, and thereby on the verge of securing non-dilutive funding in the form of an upfront payment in exchange for global or regional rights to bexmarilimab in selected indications. In such a scenario, there is a pronounced information imbalance between management and the market, as management is aware of a transaction that is expected to increase the value of the company’s share while the market is not. As management’s mandate is to create shareholder value by increasing the price of the company’s shares, it is rational to settle the payment in cash if the prevailing market capitalization does not reflect the company’s fundamental value. If there is no information asymmetry, the settlement method, cash or shares, is largely indifferent and differs primarily due to the effective 10% discount applied to in-share payments.

The speculation quickly withered, as HCM advanced two payments only five days later, which Faron covered in shares. The true reason for the erratic decision remains unclear. CEO Dr. Jalkanen had purchased a small number of shares only a month prior, suggesting that no inside information was yet expected to be disclosed. Furthermore, the positive signal to the market was likely to be short lived in any case, as if it was a bluff, it was set to be called very soon, if not by HCM, then through some other avenue.

This sequence underlines how Faron’s management makes decisions that are difficult to interpret as an outsider and often lack an evident financial rationale. It makes predicting future developments based on known events difficult, as one cannot operate under the premise that the company makes only rational decisions. The IPF loan repayment is another prime example in this regard.

Early IPF repayment in April

In April 2025, in conjunction with the HCM bond agreement, Faron decided to terminate its loan agreement with IPF Partners by repaying the remaining principal early. The IPF loan, in aggregate, was highly similar in economic substance to the HCM bond. The IPF loan carried interest at three month EURIBOR plus 9%, rendering it arguably less expensive than the HCM bond on a like for like basis. Please note that the coupon of the HCM bond is not directly comparable to the interest rate of the IPF loan, as the coupon is merely a technical parameter used to calculate periodic coupon payments. For further discussion of the effective cost of the HCM bonds, please refer to our earlier article, where we examined the matter in greater detail here.

Unlike the HCM bond, the IPF loan included warrants as a kicker. However, when assessing the early repayment of the IPF loan, these kickers are not relevant, as they were issued in conjunction with the loan and therefore constituted sunk costs at the time of the early repayment.

Furthermore, the IPF loan was secured, unlike the HCM bond. Later in this article, we will argue why the collateral was not as material a downside for Faron as management has suggested, and how such collateral packages can be mutually beneficial in the context of pre revenue biotechnology companies.

One last key difference between the instruments is that Faron may choose whether to settle the HCM bond instalments in shares or in cash, which was not the case under the IPF loan.

Faron used the majority of the proceeds from the First Tranche Bond to repay IPF the loan amount in full. The principal amount, including accrued interest, was just under €8 million at the time, on top of which Faron paid a substantial €1.1 million early exit fee. The exit fee was material, raising the question of why Faron was so willing to pay an exit fee amounting to over 13 per cent of the remaining loan balance in order to exit a transaction it had previously described as something that

strengthens our financial position and adds flexibility to our funding strategy.

On the other hand, the HCM bond agreement adds little flexibility. In practice, the principal flexibility it may add relates to the absence of covenants requiring a specified cash buffer. Conversely, it materially reduces flexibility with respect to financing alternatives, as Faron cannot issue further HCM Bond tranches nor equity without resetting the conversion price of the existing tranches. For more on the topic, please see chapter three.

The True Reason Behind The Early Exit

As previously calculated, the effective interest rate of the HCM bonds (if paid in cash), is

which gives us an interest rate of 2.16 % for every two-month period, which equates to:

This is before accounting for the substantial exit fee payable to IPF and the effect of the discounted in-share payments. Thus, it is clear that the rationale for the early repayment cannot have been monetary, at least insofar as it concerns the standalone cost of financing in isolation. Thereby, the actual reason must be some other, possibly:

1. Faron wanted to get rid of the minimum cash and gross gearing covenants

2. Faron wanted to release the patents from the collateral

3. Faron and the new management wanted to get rid of the IPF loan

4. Faron needed to secure further debt financing which would not have been possible while still having the IPF loan

The first two possibilities are somewhat counterintuitive: running cash reserves down to the brink is not attractive for either the lender or the borrower. Especially in the context of a biotechnology company, maintaining adequate liquidity buffers is of major importance, as extending the runway too aggressively can lead to financing distress, which may necessitate expensive bridge financing and equity issuance under adverse market conditions. Similarly, collateral protects both the lender and the borrower, thereby lowering the implied cost of debt through improved credit protection. Furthermore, aving the patents as collateral is not a limiting factor when it comes to partnering as many companies hold secured debt before partnering. This is despite CEO Dr. Jalkanen stating the opposite.

The third case stems from Faron’s fatal mistake in spring 2024, when management failed to raise capital in time, leading to a breach of the IPF loan covenants, which resulted in IPF taking action in order to secure its investment and reduce the risk of default on the loan. The covenant requirements were clear and there was no excuse for the strategic mistake of running too low on funds. The incident resulted in Faron having to issue shares at an unfavorable valuation to avoid bankruptcy, which proved detrimental to existing shareholders. Given the time pressure, Faron had no time to prepare for a traditional rights issue and, thus, was forced to commence a share issue without preferential rights for existing shareholders, something that no company should ever do because it, by definition, destroys shareholder value when the strike is below the market price before the announcement. IPF’s actions were justified, but it is no wonder that Faron wanted to terminate the agreement at the first possible opportunity.

In the fourth case, we shall consider a scenario, where Faron had raised an amount corresponding to the net proceeds of the First and Second Tranche HCM Bonds excluding the IPF repayment (13+9-8=€14 million) through other avenues. Issuing HCM bonds on top of the IPF loan would not have been permitted by IPF, so the funding would have likely been equity based. Can Faron any longer attract equity investments at a reasonable discount to the prevailing share price? The issuance of the HCM bond suggests that no, which marks a key disadvantage for Faron going forward.

For more on the topic, please refer to chapter three, where we compare Faron’s financing options in more detail.

Faron Is Issuing New Shares To Cover HCM Bond Instalments

On 27 May, Faron issued 5,000,000 treasury shares with a single purpose:

to further prepare for any future conversions of the First Tranche Bond.

The first HCM bond instalment fell due before the shares could be registered. The second instalment was, surprisingly, paid in cash, while the two subsequent accelerated instalments were settled in shares using the treasury share balance. Oddly, the third and fourth scheduled instalments, as well as the third advanced instalment, were covered by issuing new shares rather than using the treasury shares that were initially created for this sole purpose.

There is little reason to deviate from the declared purpose only a few months later, unless Faron has a specific rationale for preserving the treasury shares. At present, we are unable to offer a substantiated explanation for why Faron has chosen to act as it has. We consider that Faron should publicly disclose whether the intended use case for the issued shares has changed, as this would constitute material information to which shareholders are entitled.

Indicated Timeline No Longer Credible

Faron is aiming to recruit the first patients into the BEXNOVA study in Q2 2026. Given the delays in securing funding for the study, we consider the stated timeline to be no longer credible.

CHAPTER 2: HCM Bonds & Junk Equity

What Are The HCM Bonds

The HCM bond is a debt structure that provides Faron with the option to settle any instalment in shares at a discount of at least 10% to the prevailing share price. Additionally, HCM has the right to convert the outstanding bonds into shares at a fixed conversion price, subject to reset provisions, which we discuss in chapter three. For more on the bond arrangement, please refer to our earlier article, which covered the topic in more detail here.

In academic literature, convertibles with floating conversion prices are often referred to as ‘junk equity’, ‘toxic convertibles’, or ‘death-spiral convertibles’, as empirical evidence suggests that entering into such unfavorable financing structures tends to depress the share prices of the respective issuers. We presented empirical observations of the share price performance of European life science companies that have entered into death spiral convertibles issued by HCM. If you have not read the article, please feel free to refer to it here before progressing, as it offers valuable background information. As a result, we found that none of the peer companies has been able to generate positive returns for shareholders after relying on HCM financing, with an average annualized return of -70.29% since the transaction. Our findings are consistent with academic research, which has found that a stock price declines by an average of 34% after one year following the issuance of a death-spiral convertible and that 85% of cases generate negative one-year returns. However, it is worth noting that not every death spiral bond holds identical terms. Herein, we refer to any bonds that include a floating price conversion mechanism as death-spiral convertibles.

In theory, convertible bonds that are repaid in the future are superior to equity financing in situations where management believes that the company’s current share price is depressed. This may be because management has information it is unable to disclose publicly, or is unable to convince the market that the share is underpriced. In that way, the company can secure funds now and expect that the mismatch between perceived value and price narrows over time. However, in practice, and particularly in the context of death-spiral convertibles, the issuer often has limited alternatives beyond such structures.

The Optimal Strategy For The Bondholder

The optimal strategy is the approach that maximizes the value of the bond to the bondholder. The strategy depends, of course, on the precise structure of the convertible, but we can examine a standardized case in which certain key conditions hold. That is, that there is:

1. A reference price or a set of reference prices, of which typically the lowest is selected. In Faron’s case, the reference price is the lowest of

   1. the fixed conversion price

   2. the Volume Weighted Average Price (VWAP) on the relevant payment date

   3. the lowest of the VWAPs on each of the five consecutive dealing days ending and including the dealing day immediately preceding the relevant payment date.

2. A conversion price that is set at a discount to the reference price. In Faron’s case, the discount is 10 per cent to the reference price.

Given these constraints, the bondholder can sell the shares short once the longest maximum reference price window has begun. That is, when the longest period in the reference price set has started. In Faron’s case, that is immediately if the bond is in-the-money with respect to the fixed conversion price, and five days otherwise.

By selling the shares short, the bondholder can not only lock in the profit, but also increase profits if the share price falls as a result of the short selling or otherwise. This is because the minimum number of shares the holder is set to receive is fixed, and therefore is certainly sufficient to cover the short position. This is the origin of the nicknames toxic, as bondholders’ and shareholders’ incentives are clearly opposed, and death-spiral, as the price decline translates into more shares for the bondholder, which enables additional shorting and deepens the spiral. Mathematically, this equates to an extra profit of

where:

In Faron’s case, there exists a possibility that Faron opts to settle the instalment in cash. In such a case, HCM appears to be exposed, as it bears risk due to an open short position that it would then need to close by buying shares in the market. However, this seemingly important flaw is mitigated by HCM’s right to bring forward payments in between the scheduled payment dates. Furthermore, at present, the company is not in a financial position where it could elect to settle any instalments in cash.

HCM’s Realized Strategy

It is difficult to borrow shares on First North. Perhaps as a result, HCM has not utilized the strategy outlined above. The realized strategy appears to have been to sell the shares only after receiving them, often on the very same day. Should HCM adopt the optimal strategy, it could induce further downward pressure on the share price.

HCM Is A Predator

As outlined above, death spiral convertibles are a toxic structure designed to transfer value from shareholders in favor of the bondholders. In such a relationship, it is clear that bondholders occupy a position of structural bargaining power with respect to both the debtor and the shareholders.

We saw an embodiment of the toxic structure when Faron requested the Second Tranche to be subscribed by HCM. It took 17 days for HCM to act upon the request. On the first trading day after the request, Faron’s share price fell by approximately 7% to €2.085, reflecting the reduced equity valuation. During the 17 day period, one scheduled instalment fell due, which HCM sold into the market at the first opportunity. As a result, HCM was able to lower the reference price used to calculate the conversion price for both the First and Second Tranche convertibles to €2.02, amounting to an approximately €70,000 gain for HCM and an equivalent cost to shareholders.

CHAPTER 3: HCM Bond Tranches & Valuations

Was Issuance of The Second Tranche HCM Bond a Sensible Choice?

On 24.11.2025, Faron requested HCM to subscribe to the Second Tranche Bond, as per the agreement. The reason for the decision was that the company was about to run out of cash and needed to secure additional funding. Given that the financial runway was only one to two months, effectively the only other option, besides a non-dilutive partnership upfront payment, was either a directed issue or the Second Tranche Bond.

To assess which of the options was more favorable, one must understand the factors affecting relative attractiveness, as well as the definition of favorable. Herein, our perspective is that of ordinary shareholders, that is, shareholders who are not invited to participate in directed share issues. Consequently, favorability is defined as which option costs ordinary shareholders the least, that is, the option that results in the greatest equity attributable per ordinary share.

As per these definitions, the impact of issuing the Second Tranche convertible consists of two factors: the valuation premium embedded in the Second Tranche convertible relative to the cash proceeds, and the impact on the reset mechanism with respect to the First Tranche Bond.

Price Reset Mechanism

The bond agreement includes a price reset mechanism that resets the conversion prices of the outstanding convertibles in the event that further HCM bonds or equity are issued. The company has not publicly disclosed the precise terms governing the price reset mechanism, but we believe them to be as follows. When issuing further tranches of the HCM bonds, the existing tranches reset to the conversion price of the newest tranche if the new conversion price is lower than that of the previous tranche. Furthermore, any equity offerings would reset the conversion price to the offer price of the equity issuance.

We believe that the company should publicly disclose the precise terms of the price reset mechanism, as the absence of such information induces unnecessary uncertainty and speculation. Furthermore, it makes evaluation of the company’s future financing options more difficult, as we cannot be certain of all the implications of such options. Our understanding of the price reset mechanism is based on comparable agreements involving HCM and the Monte Carlo simulation presented in Faron’s internal reporting.

Valuing The Impact Of The Issuance Of The Second Tranche Bond

The impact of issuing the Second Tranche bond equates to the increase in the value of the First Tranche resulting from the conversion price reset, and the value of the Second Tranche Bond, less the cash proceeds raised. Mathematically, it amounts to:

where:

To arrive at consistent valuations, we have obtained a Monte Carlo model consistent with the one used in Faron’s internal reporting. Please note, however, that we do not necessarily consider all the assumptions underpinning the parameters to be fully credible, but to achieve consistency with the values reported in Faron’s half year reports, we have decided to adhere to them. This also enables you to compare the valuations more directly with those reported by Faron. Should Faron choose to alter the parameters in forthcoming reports, we will publish updated models consistent with such changes. Please consider subscribing to be among the first to gain access. Subscribing is free and we guarantee not to present any advertisements nor to employ any paywalls.

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Introducing The Model

The Monte Carlo model is used to address the challenges arising from the prevalence of unobservable inputs, such as equity issuances, that affect the valuation of the convertibles. We run the simulation 1,000,000 times to arrive at an expected outcome, which represents the current fair value of the instrument. The process is as follows, consistent with the methodology used in Faron’s internal reporting:

1. Simulate monthly share price development using Geometric Brownian Motion

2. Simulate Qualified Equity Offering (QEO) events using a Poisson process that triggers conversion price resets

3. Simulate Change of Control (CoC) events using a geometric process

4. Evaluate the criteria for the Second Tranche Bond and, if met, reset the conversion price of the First Tranche

5. Calculate discounted coupons and instalments

6. Calculate total cash flow and terminal payment

Please note that step four is omitted when calculating the value of the First Tranche bond after issuance of the Second Tranche bond, or when calculating the value of the Second Tranche Bond. The terms for the Third Tranche Bond are as follows:

1. The arithmetic mean of the daily traded value of the shares on each trading day comprised in the three-month period preceding the issuance of the Third Tranche Bond is greater than €0.5 million and

2. the market capitalization is greater than 120% of its market capitalization on the date of issuance of the Second Tranche Bond.

3. The Third Tranche Bond can be issued only six months after the Second Tranche Bond, at earliest 11.05.2026

The first condition is achievable, but the second is more complicated: should Faron enter into a partnership agreement, it is unlikely to need to issue the Third Tranche Bond. Conversely, if not, the market capitalization is unlikely to exceed the required threshold. Furthermore, Faron’s cash runway is only barely long enough to support operations until 11.05.2025. The required market capitalization amounts to €231 million, as the share price on the issuance date was €2.02 and the number of outstanding shares was 114.42 million. In May 2026, the number of outstanding shares will amount to approximately 116.2 million, assuming the share price remains at €2, no shares are issued beyond those related to the HCM bond, and no payments are accelerated.

Value Of The First Tranche Bond

Here are the key parameters of the First Tranche Bond as of the release of this article (15.12.2025):

Principal: €15 million principal, issued at 92.5 % of par

Maturity: 2 October 2027, originally 2 April 2028

Coupon: 7.5 % p.a.

Amortization: 18 equal installments, beginning on June 2, 2025

Conversion price: €2.42, originally €2.94 (20% premium)

Settlement: Cash or shares at 90% of VWAP of the reference price

Remaining principal: €9.2 million, 11 instalments

As a result, we can conclude that after the seventh payment and the reset, the First Tranche Bond is valued at €11.7 million, approximately 125% of its principal, as opposed to €11.5 million, should the reset not have occurred. Similarly, the Second Tranche Bond is valued at €13.9 million. Thus, the total fair value of Faron’s debt at present is approximately €25.9 million, comparable to a remaining principal of €19.2 million.

Correspondingly, we can assert that the impact of issuing the Second Tranche Bond amounts to:

A €4.85 million loss in equity value amounts to approximately €0.04 per share, accounting for some of the share price decline on the day after the announcement. The remainder is attributable to the delays for which the issuance of the Second Tranche Bond served as a signal.

Comparing The Second Tranche Bond To a Directed Issue

Now, let’s consider a directed issue, where the company would have raised the same amount of funds (€9.25 million) at a 10% discount to the share price preceding the announcement of €2.24, corresponding to an issue price of €2.02. In this scenario, 4.58 million shares would have been issued.

We consider that the First Tranche Bond would have been reset to the issue price of €2.02, instead of €2.42, resulting in an increase in value of €0.7 million, or €0.5 million more.

Thus, the impact of a share issue would have amounted to:

where:

and:

The equity impact amounts to €1.7 million, well below the comparable €4.85 million. This is before accounting for the fact that the values of the convertibles will increase materially should management succeed in its objective of attracting a partner on favorable terms. This suggests that investors are unwilling to invest in Faron even at a discount, or that alternatives were not considered, as issuing shares at even greater discounts would have been more favorable for existing shareholders than issuing additional death-spiral convertibles.

The company stated that:

The Board has conducted an overall assessment of the issuance of the Second Tranche Bonds, considering its key terms and commercial merits, the reputable standing of HCM as well as other explored financing alternatives potentially available to the Company.

The comment suggests that either the board’s ‘overall assessment’ has been conducted very poorly, or that directed issues are no longer a viable alternative for the company. Neither possibility reflects favorably on the situation.

In fact, the issue price in a comparable directed issue could have been as low as €1.65 and still have been more favorable for existing shareholders than the issuance of the Second Tranche Bond. This further underlines how unfavorable and expensive death-spiral convertible financing can be, and how it is in shareholders’ best interests to avoid such structures at almost any cost. We find the board’s ‘overall assessment’ insufficient to justify bypassing shareholders’ preferential rights.

KPIs to Consider

As outlined in chapter 2, death-spiral convertibles are a toxic structure that can prove detrimental to the share price. However, the impact scales with the size of the payments relative to the company’s market capitalization. That is, the larger the payments are in relation to market capitalization, the greater the risk that the well documented dynamics of death-spiral convertibles become pronounced. It remains to be seen whether Faron’s management can generate sufficiently positive catalysts to keep the share price supported despite increasing selling pressure stemming from the toxic convertibles.

CEO Comments

Faron CEO Dr. Jalkanen commented on the announcement regarding the request for HCM to subscribe to the Second Tranche HCM Bond:

This is the exact situation for which this bond structure was designed for, and we are very pleased with HCM’s continued support.

Is it really? From HCM’s perspective, certainly, as the bond offers attractive returns to HCM with limited risk. However, given that a company’s chief executive should consider the shareholders’ perspective, the comment appears bizarre. Is a convertible with a fixed conversion price truly designed for a moment immediately before Faron is set to achieve a transformative global partnership agreement with a large pharmaceutical company? The comment makes the CEO appear either uncompetitive or poorly informed, assuming the earlier remarks about seeking a partnership at this stage remain valid.

The latter part, where Dr. Jalkanen says that the company is very pleased with HCM’s continued support, is similarly odd. It took HCM 17 days to act upon Faron’s request to subscribe to the Second Tranche Bond. Is such a delay a sign of continued support, particularly when the company’s cash reserves depend on the funds from HCM and such a delay could have created liquidity stress, for example if the company had needed to undertake working capital investments? This raises questions as to why Faron continues to leave financing to the last possible moment, rather than maintaining a prudent cash buffer to safeguard operational continuity.

Third Tranche Option

HCM has the unteral right to issue the Third Tranche Bond during a twelve month period, starting six months after the issuance of the Second Tranche Bond. The right is effectively a call option, which comes to play, if there are any positive news that have a substantial positive effect on the share price. That way HCM can issue the bond with a premium of 20% to the price before the upswing. The option can still be relevant, for example, in cases where Faron has to raise capital through other avenues in H1 2026, and still achieves a licensing deal in H2 2026 or H1 2027.

CHAPTER 4: Licensing Deals

What Is A Licensing Deal

In an out-licensing deal, a biotechnology company, such as Faron, typically grants a partner the rights to develop and commercialize the drug candidate in selected indications. In efficient markets, such a transaction creates no value in and of itself, as value is ultimately attributable to the molecule and its commercial prospects.

Thus, to maximize value, the drug must be commercialized in an effective manner once approved. That is, value is created when a partner can provide capabilities that cannot be sourced elsewhere.

At earlier development stages, the principal contribution from a partner’s side is capital. Inherently, there is limited incremental value that a partner can contribute before commercialization is imminent, beyond funding. Most studies are nonetheless conducted by external Contract Research Organizations (CROs), as relatively few large pharmaceutical companies maintain the internal operational capacity to run trials at scale given that their core business is not the execution of studies, but rather in development and commercialization.

Why Do Share Prices React To Licensing Deals?

Is it not a contradiction to the above that share prices react to licensing deals if they do not create value? No, since a biotechnology company’s share price is not merely a function of the pipeline, but of a broader set of variables, only one of which is the pipeline and its candidates’ future cash flows.

The value of a project is relatively straightforward to approximate, even though the cash flows are typically distant and subject to risk and uncertainty. Herein, risk refers to the Likelihood of Approval (LoA) and its components. Uncertainty, however, refers to the irreducible forecasting uncertainty that arises when projecting variables years ahead. For example, approximating the patient population of a certain disease ten years from now involves substantial uncertainty, but no risk. Thus, a licensing deal can change market expectations regarding the future cash flows attributable to one currently outstanding share.

Global Licensing Deal Is Unlikely

Faron has repeatedly stated that it is in the process of

conducting the needed business activities ahead of the registrational study in HR MDS.

Such business transactions could include raising equity or debt financing, or a combination of equity and debt. On the other hand, it can refer to selling a portion of the future cash flows of the company’s wholly owned assets for payments now, or at a specified time in the future, commonly referred to as out-licensing.

We believe that Faron is unlikely to sign a global licensing deal at this stage for the following reasons:

1. Faron is preparing to sponsor the upcoming phase II/III trial.

2. Faron is in a very poor negotiating position due to the HCM financing.

3. Faron’s organization and cost structure is very fat for early stage development.

4. Faron is a family business.

5. CFO is retiring.

In September, Faron announced three full time positions that indicate that Faron is preparing to act as the sponsor of the upcoming BEXNOVA study. There are few examples where a biotechnology company would have signed a global licensing deal before the initiation of a registrational study, but still retained the sponsor role. For more on the topic, please refer to our earlier issue here.

After the subscription of the Second Tranche Bond, Faron has no further secured forms of financing. As a result, the company is in a very poor position to raise additional capital, as the Third Tranche HCM Bond includes conditions that are unlikely to be met. Its issuance would require additional assurances set by HCM, which could include equity issuance. Both equity issuance and further bond issuance would reset the conversion prices of the existing debt instruments, thereby increasing the cost of such transactions. Furthermore, the company has a dual listing, which hinders its ability to conduct traditional rights issues. Effectively, this can lead to situations where the company is forced to transfer value away from existing shareholders should it opt to raise equity through directed or public share issues. Consequently, any potential partners have the option to wait until Faron produces placebo controlled data later on.

Faron’s headcount exceeds 30, which is a large number for a Nordic biotechnology company that has struggled financially in the past. Additionally, Faron has continued to hire experienced professionals who command high salaries. Should Faron out-license its lead project now, it is clear that the cost structure would need to be adjusted. However, if Faron aims for a global licensing deal after the first controlled readout in 2027, the current organizational structure appears suitable for performing the responsibilities of a sponsor of a pivotal phase II/III study. It is rare for a company to pursue business transactions that would effectively render its existing workforce redundant. This is especially apparent in single-project family businesses.

This brings us to the fourth point: Faron is a family business, which introduces an additional dimension to the analysis. If Faron can, by any means, carry the project to a material value inflection point, such as the first controlled readout, it will.

CFO Out

On 1.12.2025, Faron announced that its CFO, Mr. Wichmann, is retiring and that the company has hired Mr. Dekkers to assume the CFO role. The CFO position is central in partnering discussions, and a CFO’s departure at such a transitional moment raises questions. If Faron is indeed amid intensive partnering discussions, Mr. Wichmann’s decision to retire in the middle of them appears highly extraordinary. It leaves the company in a difficult position, as it must onboard a new executive in the midst of discussions, which can complicate and prolong negotiations, if not worse. Thus, we believe that no CFO would retire at this stage when there is an option to work a few months longer and potentially take credit for achieving a partnership agreement.

We view that it may be plausible that Mr. Wichmann’s performance was not up to standard, which may have led to operational friction and ultimately to the appointment of Mr. Dekkers. Furthermore, it could indicate that some discussions have reached a dead end, which may have enabled Faron to change the CFO without causing additional discontinuity. Furthermore, Mr. Wichmann was responsible for the HCM arrangement, which has indeed been a major flub that cannot have been overlooked by shareholders, management, or the board. Additionally, Faron’s disclosures have occasionally been subpar. However, nothing in the manner in which the retirement was announced suggests this. Either way, the chosen approach appears designed to minimize market disruption.

What Happens To Mr. Wichmann’s Options?

Mr. Wichmann holds a large number of options that may become valuable should Faron’s share price rise substantially. It is up to the board to decide, but we expect that the options remain in force.

Would Faron Consider Licensing At This Stage Had It Capital?

The reason why partnership discussions feature in the company’s communication is that Faron has little cash. Should Faron be better funded, advancing to the first part of the registrational study on a self-funded basis would be a clear strategic choice. Reaching that milestone could mark a significant increase in project value, but it could also bring the Jalkanen family to the forefront of cancer research, which would not be the case should the company decide to out-license before the major value inflection point.

Controlled data is a de-facto requirement for a favorable global licensing deal. Many Nordic companies, such as Medivir and Alligator Biosciences, have learned this the hard way. The BEXNOVA study is designed in such a way that it enables Faron to out-license the project seamlessly after the first unblinded analysis, following the dose-optimization phase.

Furthermore, the treatment of potential additional indications has likely complicated negotiations, as their monetary value is apt to be viewed quite differently by the two sides, not to mention the sentimental value that a potential widespread breakthrough may hold for a family-run business.

Regional Deal More Likely

Faron has other options besides a global licensing deal. It could opt to sign a regional licensing deal with an Asian company to secure funding, while still retaining the majority of the commercial rights and the responsibility for the forthcoming phase II/III trial. Such a transaction could offer a middle ground between the two alternatives.

If sufficiently front-loaded, such a deal could generate enough cash for Faron to fund operations until late 2027, enabling Faron to progress through the potential value inflection point, namely the readout following the phase II dose optimization phase.

Both Regional Deal & No Deal Indicate That Faron Moves Forward Individually

Should Faron choose either to sign a regional deal or to retain all commercial rights for now, Faron would act as the sponsor of the upcoming BEXNOVA trial, at least initially. This is consistent with the evidence suggesting that Faron is preparing to sponsor the upcoming trial.

CHAPTER 5: What Analysts Get Wrong

Investing In Faron Is Sequantial

Investing in Faron, or in many other biotechnology companies, is sequential. That is, events occur in sequence, and the set of feasible future events depends on prior events, whereas the outcomes of those events do not themselves depend on history. For example, a data readout in a specific program can be an event in the event space for a particular company. However, it can never be reached if an earlier event resulted in the sale of the program. That is why, by owning the company, one can effectively only take exposure to the outcome of the next event in the sequence, and the weight of any more distant events is limited, as their achievement is not necessarily probable.

This does not mean that a case based approach is redundant, quite the opposite. However, the cases must be defined in such a way that they all relate to the same event, otherwise their applicability for investors is limited. We recognize that certain constraints may exist that influence how cases can be defined, but this does not alter the underlying principle.

Debt Must Be Measured At Fair Value

When issuing convertibles where the fair value of the instruments materially differs from principal, it is of utmost importance to reflect the instruments at fair value. Otherwise, part of the instruments’ intrinsic value is overlooked.

In case-based valuation approaches, one can argue what the equity value in any given case should be, and based on that, value the remaining convertibles and other strikes accordingly to arrive at a per share value.

Equity Is Equity

Warrants and other equity options issued by the firm are claims on the equity of the firm and must be treated as equity. This is especially important in the context of a company with very high volatility, such as Faron. The valuations can be calculated precisely, and there is no defensible rationale for ignoring them, as they have a material impact on the equity attributable to current shareholders, especially in positive scenarios.

In future, we will publish an article about Faron’s takeover values. That is, the value distributable among the current share count in the event of a buyout. The figures are materially different given the large number of claims on the company’s equity that are not yet reflected in the share count. All of which have exponential return profiles.

CHAPTER 6: Merry Christmas

Rose Garden Capital thanks its readers for the year 2025, and wishes a prolific business year 2026. Remember to love the people around you.

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance. Although every effort is made to ensure accuracy at the time of publication, errors or omissions may occur. Always corroborate key facts with multiple reputable sources and, where feasible, trace assertions back to the original source material. References to third-party content are provided solely for convenience and do not imply endorsement, and no responsibility is assumed for their completeness, reliability, or timeliness. The topics covered are not neccessarily exhaustive.

Faron Pharmaceuticals is a Nordic biotechnology company listed on First North Helsinki and on the AIM market in London. The company develops immuno-oncology therapies with bexmarilimab as the lead asset and is preparing for Phase III. Faron is in a strong position to advance its clinical programs through multiple pathways.

In this article, we gauge aspects of the contemporary issues surrounding the company, including the upcoming Phase III study and financing options.

HCM Bond

In spring 2025, Faron entered into a convertible bond agreement with Heights Capital Management (HCM). The agreement included three tranches, the first of which was drawn immediately, mostly to repay the IPF loan facility. The second and third tranches are yet to be drawn. Here are the main terms of the first tranche bond:

Size: €15 million principal, issued at 92.5 % of par

Maturity: 2 April 2028 (three-year tenor)

Coupon: 7.5 % p.a.

Amortization: 18 equal installments, beginning on June 2, 2025

Conversion price: €2.94 (20% premium)

Settlement: Cash or shares at 90% of VWAP

The second and third tranche bonds have similar terms except for the nominal amount of €10 million. The notable difference, however, is that the issuance of the second tranche bond effectively grants HCM a call option in the form of the third tranche bond, exercisable during a twelve-month period starting six months after the issuance of the second tranche bond. For more information about the convertible bonds arrangement, please refer to our earlier issue here.

Effective Interest Rate of the Convertibles

The convertibles are issued at a reasonable 7.5 % coupon. However, the coupon is merely a technical figure, functioning as a basis for computing the periodic interest. Thus, it should not be confused with the cost of the loan or the return on investment for HCM. We can solve the effective interest rate (EIR) numerically by summing the future cash flows.

This gives us an interest rate of 2.16 % for every two-month period, which equates to:

Faron has indicated that it opts to cover the installments in shares instead of cash. As per the terms, the in-share payments are conducted at a 10 % discount to the market price. This effectively increases each cash flow by the inverse of 90 %, resulting in an actual EIR of 22.47 %, nearly double the previous figure.

In addition to the above, HCM has the right to:

1. Convert the bonds into shares at the conversion price that is subject to recalculation in the event of dilution

2. Advance up to two installments between the scheduled bimonthly installments (at most nine advanced installments during the first year)

3. Issue the third tranche bond by a unilateral decision (within a specified time window, after the second convertible has been drawn)

Conversely, Faron has the right to choose whether to satisfy the installments in cash or in shares.

All of these rights have monetary value to the holder, but it is difficult to measure them numerically. This is problematic because, under IFRS, the bond must be measured at fair value.

Accounting of the Convertibles

International Accounting Standard (IAS) 32 determines whether the instrument is debt or equity. In this case, the convertibles are classified as a financial liability because the conversion options may vary in the number of shares, as the conversion price is subject to adjustment in the event of dilution.

Furthermore, IFRS 9 classifies whether the financial liability should be measured at amortized cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). FVTPL is the only available option because the conversion options are included.

Finally, IFRS 13 is used to determine the fair value of the instrument. The convertibles are classified as Level 3, as their value depends on unobservable inputs, namely events such as Qualified Equity Offerings (QEO, which affect the conversion price), Change of Control (CoC, e.g. a buyout) and the proportion of cash payments. These variables are impossible to predict or observe, thus the only way to capture their effect is to employ a Monte Carlo approach that can reflect the interdependence of the variables. This is also required to ensure the convertibles are correctly valued on the balance sheet.

Monte Carlo Analysis of the Convertibles

As a result, Faron has conducted an analysis for accounting purposes to determine the fair value of the convertibles (i.e., the price at which the convertibles would trade). The analysis is conducted in conjunction with the half-year reports. Specifically, the following parameters apply to the situation on June 30, 2025:

As of publication of this article, Faron has paid 5 installments, thus there are still 13 installments left. Of the 5 installments, only one has been paid in cash, resulting in a cash-paid ratio of 20% as opposed to the anticipated ratio of 50%. To arrive at a ratio greater than or equal to 50%, Faron should choose to cover at most 5 of the remaining 13 installments in shares. A ratio below 50% would result in a higher fair value of the convertible.

Additionally, the share price has decreased materially since the analysis, limiting the value of the option to convert the convertibles into shares.

Moreover, it is worth noting that the QEO rate per year is a parameter in a Poisson process, not the likelihood of an equity offering. The likelihood of an equity offering can be calculated from the rate parameter lambda:

As a result, a fair value of €19.408 million was reported, as opposed to the remaining principal value of €14.167 million. The share price was close to its level on the date of issuance of the first tranche (€2.4496), supporting the accuracy of the forthcoming calculations.

Converting the Monte Carlo Result to a Comparable Non-Convertible Bond

Now, we would like to know what the coupon rate of a comparable bond with a fixed payment schedule would be. That is, a bond where the option value of the convertible option and other perks are woven into the coupon.

We do this by discounting the deterministic cash flows using the risk-free rate to achieve consistency with the Monte Carlo analysis.

The deterministic future cash flows must equal the present fair value:

where the periodic cash flows are:

This gives us the coupon:

which yields approximately 27 %, as opposed to the original coupon of 7,5 %.

Conclusion

This example does not seek to provide exact answers but rather to illustrate how a major part of the value of the convertibles is tied to the conversion options. On the other hand, this suggests that the cost of the convertibles is reasonable in the event that the options expire valueless.

To put this into context, Faron has been funded through equity and pure debt financing until the HCM bonds were issued. Why would Faron choose convertibles right before it is set to enter into a groundbreaking partnership with Big Pharma, significantly increasing the value of the convertibles while eroding the long-awaited reward for ordinary shareholders? The only way this would be a sound decision is if management believes that the option value of the convertibles is negligible. In that case, the price of the convertibles would be sensible compared to earlier equity issues and, more notably, the previous IPF loan that carried interest at EURIBOR + 9 % on top of expenses and warrants.

BEXMAB02 - The Phase II/III Trial

The upcoming trial is set to include a dose optimization phase before advancing to the proper Phase III, contingent on strong results. The dose optimization phase would be the first chance for the drug to generate valuable controlled data in a blinded manner. It marks an important de-risking milestone for the whole project, translating into significant upside potential for the risk-adjusted value of the project. Additionally, the costs of the Phase II part would be bearable for Faron, making the advancement to Phase III a natural inflection point for partnering. It would also be a natural spot for Faron to relinquish the sponsor role to a Big Pharma partner.

What Do the Recent Hires Tell Us About the Sponsor of the BEXMAB02 Trial?

In September, Faron announced three full-time positions simultaneously that appear to be closely connected to the upcoming trial. The vacancies suggest that Faron is in need of talent for an extended period, indicating that Faron will sponsor at least the initial part of the upcoming trial. Now let’s take a look at what the roles are and some extracts of their respective descriptions:

1. Clinical Quality Assurance/Systems Manager

The Clinical QA/Systems Manager plays a critical role within Clinical Operations ensuring compliance with regulatory and internal requirements, while fostering a culture of quality, continuous improvement, and cross-functional collaboration. Clinical QA/Systems Manager also encompasses oversight of clinical systems, data governance, system validation, and vendor management, including services provided by CROs. Therefore, the ideal candidate for this new role will have in-depth knowledge and experience in clinical quality assurance, and preferably also with clinical systems in biotech or pharmaceutical industry.

Key responsibilities include:

Develop and maintain clinical trial data and quality management processes

Oversee trial data quality by identifying risks, ensuring traceability across systems and vendors, and reviewing clinical trial documentation

Lead Computer System Validation (CSV) activities on the sponsor side

Provide QA input during protocol development, site selection, vendor qualification, and trial execution

2. Senior Clinical Research Associate

The Senior CRA (Clinical Research Associate) plays a pivotal role in ensuring the quality and integrity of site management activities in clinical trials. The ideal candidate will have in-depth knowledge and experience in overseeing CROs and in trials investigating haematological malignancies. The goal of Faron Clinical Operations is to work consistently and with precision to advance our development programs, and we hope to find a like-minded professional to join our team.

Key responsibilities include:

Serve as the primary sponsor contact for CRO and investigational sites regarding monitoring. Facilitate clear and consistent communication among all parties.

Oversee the site monitors and conduct sponsor oversight monitoring visits globally

Support site selection and other activities related to investigational sites

3. Regional Clinical Trial Manager

The Regional CTM is responsible for the operational oversight and execution of clinical trials within a designated region. The Regional CTM serves as the primary regional point of contact for investigational sites, Contract Research Organizations (CROs), and vendors, and plays a key role in driving study timelines, quality, and performance. The ideal candidate for this new role will have in-depth knowledge and experience managing Phase II-III trials across multiple countries or regions, preferably in haematological malignancies.

Key responsibilities include:

Lead regional execution of clinical trials from start-up through close-out, ensuring adherence to timelines, budgets, and quality standards

Oversee regional site activities in collaboration with CROs and internal teams

Role is European based but may require travel and ability to accommodate different time zones

Together these vacancies leave little room for speculation: Faron will at least initiate the trial as the responsible sponsor, which is inconsistent with the notion that a Big Pharma partner – with superior resources – would take over the project in connection with a licensing deal in the near future.

Moreover, these vacancies were posted in early September. Would Faron have committed to hiring such talent if intense negotiations were taking place? The roles would have been redundant if the licensee had taken the sponsor role, thereby carrying the responsibilities of the above roles.

This sequence most likely suggests that Faron does not expect to enter into a conventional license agreement at this stage. In that scenario, Faron would likely aim to partner after the Phase II part of the trial to secure a better deal. On the other hand, it could suggest an unconventional agreement that involves some sharing of costs and responsibilities.

Financial Position

Faron has sufficient cash to fund operations until early January. The company must secure further financing urgently to ensure continuity. For a more detailed view of the available options, please refer to our earlier issue here.

There are currently three options:

1. Issue the second tranche convertible

2. Secure equity financing through a share issue

3. Secure non-dilutive funding through a partnership in the form of an upfront licensing payment

All of the above options depend on Faron’s bargaining power. The second tranche convertible is available for issuance solely at Faron’s discretion as long as the market capitalization of Faron exceeds €200 million. The market capitalization excludes any treasury shares. Therefore, market capitalization increases in conjunction with the in-share installments of the convertibles, provided that the share price remains stable.

It is crucial for Faron that the share price remains above the required level at all times. If it were to fall below the threshold, the convertibles would no longer be available, hindering Faron’s bargaining power in ongoing financing negotiations, including possible equity issues and partnership discussions. The second tranche convertible may not be the most attractive form of financing for Faron, but its availability is nonetheless valuable to the company.

What Happens If the Share Price Falls Below the Threshold?

If the share price were to fall below the threshold, we believe that it would trigger further downward pressure on the share price, as the likelihood of having to resort to equity financing in a tight spot would increase. However, we believe that HCM would be willing to issue the second tranche even if the terms are not met, given the favorable return profile that the bond offers for HCM. Before that, however, we must understand why HCM negotiated such a term into the agreement.

What HCM Wants

The remaining terms are as follows:

1. The arithmetic mean of the daily traded value of the Shares on each dealing day comprised in the three-month period preceding the issuance of the Second Tranche Bonds is greater than EUR 500,000

2. The Company has a market capitalisation greater than EUR 200 million on the date of issuance of the Second Tranche Bonds.

The first term is designed to ensure that HCM can liquidate the in-share payments at a desired time at the prevailing market price. It suggests that HCM is not aiming to speculate with share price development, but rather to collect the proceeds.

The second term is far more likely to be breached. It ensures that HCM is not forced to further finance Faron if its financial position were to deteriorate.

Taken together, this suggests that HCM is concerned with the current share price only to the extent that it indicates Faron has sufficient cash reserves to continue operating without disruption. Based on this, we foresee that HCM would require an equity investment of equal or slightly smaller size in order to lift the above terms.

The Likelihood of the Share Price Falling Below the Threshold

We can compute the probability that the share price falls below the threshold before the end of the year using a stochastic model of Faron’s share price movements. The result represents the likelihood of the share price dipping below the threshold, whether momentarily or for longer. We use the Q-measure and parameter values consistent with earlier calculations and Faron’s internal figures used in reporting.

Now let’s model the stock price as a geometric Brownian motion:

By setting…

and applying Itô’s lemma, integrating, and exponentiating, we obtain:

This is lognormally distributed and thus strictly positive. Now let’s denote

Integrating yields:

The desired probability reduces to:

This yields a closed-form expression for the likelihood, which is straightforward to compute using the standard normal distribution’s cumulative distribution function:

This gives us the following figure: the likelihood amounts to 61% as of October 1, up from 47%. The increase reflects the decline in the share price from €2.4 to €2.1 over September.

The likelihood is relatively high, suggesting that Faron is in no position to delay securing further financing. This is apparent to all parties, which could hinder Faron’s negotiating position on all fronts and thus decrease the likelihood of securing an agreement valuable enough to hand over the commercial rights. Based on this, we project that Faron must act before the end of October to remain in the driver’s seat.

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance. Although every effort is made to ensure accuracy at the time of publication, errors or omissions may occur. Always corroborate key facts with multiple reputable sources and, where feasible, trace assertions back to the original source material. References to third-party content are provided solely for convenience and do not imply endorsement, and no responsibility is assumed for their completeness, reliability, or timeliness.

Faron Pharmaceuticals is a Nordic biotechnology company listed on First North Helsinki and on the AIM market in London. The company develops immuno-oncology therapies with bexmarilimab as the lead asset and is preparing for Phase III. Faron is in a strong position to advance its clinical programs through multiple pathways.

Partnerships

Faron and its CEO Dr. Jalkanen have repeatedly stated that the company aims to secure partnerships with larger pharmaceutical companies to advance its clinical programs beyond Phase II. The company has pursued such an agreement for a long time. However, previously indicated timelines have slipped several times, which reflects the challenges of reaching terms in a difficult market for Nordic small-cap biotechs that depend on outside funding.

Faron seeks an agreement in which the partner fully funds the Phase III trial and provides a substantial upfront payment in exchange for rights to commercialize bexmarilimab in the United States or potentially worldwide. To justify such terms, the partner would need to share the view that the asset has significant market potential and, most importantly, a high probability of regulatory approval.

It is difficult to gauge prospective partners’ risk appetite at this stage. That said, the probability of securing a transaction has arguably improved following the strong clinical results presented in August. Given the limited visibility and the existence of other viable strategic paths, a scenario-based approach to valuing Faron is warranted.

Potential Timings for a Partnership Agreement

A partnership could materialize at one of the following points:

1. Before the initiation of the Phase III study

2. After the initiation of the Phase III study but before the interim readout

3. After the interim readout

In the first scenario, the partner would likely fund the entire Phase III study. In the second scenario, Faron would initiate and technically fund the study on its own, with partner funding arriving after initiation. This would require equity financing, potentially complemented by the remaining HCM bonds. The third scenario would require the largest amount of financing and would likely involve multiple sizable funding rounds. This article focuses on the latter two scenarios, both of which require additional financing beyond the current cash reserves.

Timing Matters

If the initiation of the Phase III study were delayed, it would shorten the period during which Faron’s drug bexmarilimab would benefit from market exclusivity. This would reduce the company’s future cash flows. A delay would also push back the timing of regulatory approval, which would have the same negative impact. For these reasons, it is in Faron’s best interest to advance the study as quickly as possible, increasing the likelihood of the latter two scenarios.

If no suitable partnership agreement is available, Faron should, in our view, proceed by funding the Phase III study independently. The company has on several occasions demonstrated its ability to raise capital at attractive valuations. For a more detailed discussion on why we believe self-funding is a feasible option for Faron, please see our earlier report here.

Independent Financing

By self-funding the Phase III study, at least to some extent, Faron would retain the valuable commercial rights for longer. If successful, this could create substantial value for shareholders. The company’s position in partnership negotiations would also be stronger which would support higher royalty rates and milestone payments and help Faron advance its pipeline in other indications more quickly.

Should Faron self-fund the Phase III study, it does not mean that Faron would conduct the study in-house but in collaboration with a contract research organization (CRO). In fact, even if Faron were to partner with a larger pharmaceutical company, the Phase III study would likely at least partly be conducted by a CRO. This underlines that the real value-increasing inflection point with regard to big pharma collaborations is in the marketing and commercialization phase, where the big pharma partner can contribute capabilities that cannot be bought elsewhere.

Conducting a large Phase III study is nonetheless highly expensive. Funding required through the Phase III interim readout is likely between €50 million and €100 million. The absolute amount of equity and debt financing could be lower if a partner is secured before the interim readout. Additionally, it is worth noting that the FDA does not require the study to be fully funded upfront. It requires only that adequate resources are available to conduct it.

Faron has already secured €18.5 million in funds from Heights Capital Management (HCM) in the form of convertibles that are yet to be drawn. For more information about the convertible bond agreement, please refer to our earlier issue here. In addition to the HCM funding, Faron would need to seek equity investments from institutional investors around the globe and possibly from retail investors in Finland and in the United Kingdom.

AGM’s Authorization To Issue Shares

Faron’s Annual General Meeting (AGM), held in March, authorized the company to issue up to 30 million new shares.

Articles of Association

Faron’s articles of association state with regard to deviation from the pre-emptive rights of the shareholders:

If the Board of Directors proposes that the General Meeting of shareholders makes a resolution on a share issue or issue of option rights or special rights entitling to Shares in deviation from the shareholders’ pre-emptive rights or on a share issue authorisation that does not exclude the right of the Board of Directors to resolve on a share issue in deviation from the shareholders’ pre-emptive rights, such resolution shall be made by a qualified majority of three quarters (3/4) of the shares represented and votes cast at the General Meeting of shareholders.

The authorization was approved by a three-quarters majority, which enables the company to use the authorization in connection with a share issue.

Traditional Rights Issue Not Feasible

Faron is listed on First North Helsinki and on the AIM market in London. Because of the dual listing, a rights issue would be difficult, time-consuming and costly. After Brexit, a rights issue would also require separate regulatory approvals in both markets. This does not make a rights issue impossible, but, in our view, it is unlikely given the range of other feasible alternatives.

First Tranche Payments

Faron issued 5 million treasury shares after the convertible bond agreement. The shares are intended to settle HCM bond conversions. The issuance occurred only after the HCM convertible bond announcement. As a result, the first scheduled amortization fell due before the newly issued treasury shares could be registered. The first payment therefore had to be settled by issuing new shares instead of using the treasury shares.

The second payment due in August was settled in cash. The first transactions that affected the treasury share balance were the two advance payments that were settled in shares. These advance payments, together with six days of interest, totaled €1,682,067 which corresponded to 857,322 shares. After these payments, the company held 4,142,678 treasury shares.

Scheduled payments up to and including April 2, 2026, amount to approximately €3.8 million. If the existing share issue authorization is assumed to be allocated to the share offering and other measures discussed later, additional treasury shares would be issued only after the 2026 AGM. If no treasury shares are needed for other purposes before the 2026 AGM, if all scheduled payments are settled in shares, and if none are brought forward, the current treasury share balance should be sufficient to cover the loan costs until that time. More specifically, the treasury share balance would become insufficient only if the weighted average share price applied to these settlements were to fall below €1.03. If that were to occur, additional shares could be issued provided some authorization remains available, which would involve only modest extra regulatory work.

Potential Capital Raise Structures

Given the high costs of extensive Phase III studies, it is highly likely that HCM bonds will play a role in a potential capital raise. This section focuses exclusively on the scenario in which Faron opts to self-fund the Phase III study to at least some extent.

Second Tranche Bond

The second tranche bond has terms similar to the first tranche bond. It is redeemable until late April 2026.

Effect of the Second Tranche Bond on the Authorization

If Faron issues the second tranche bond either independently to support prolonged partnership discussions or as part of a larger capital raise the remaining authorization to issue new shares would be affected. This would occur because special rights would be issued in accordance with the Finnish Companies Act.

The Special Rights

The special rights are purely technical and exist to meet legal requirements. For that reason, the exact number of special rights attached to the bonds is not fixed.

For the first tranche bonds, a total of 12,000,000 special rights were issued. This equals 80,000 special rights per bond with a principal value of €100,000, which corresponds to a 4 to 5 ratio. If the same approach is applied to the second tranche bonds, a total of 8,000,000 special rights would be required.

The ratio appears conservative and suggests the company sought to ensure that no additional special rights would be needed for the first tranche, even in the event of further dilution. The two payments that were brought forward also reduce total interest expense, which further limits cost and dilution and thus the usage of special rights.

Another possible reason for the 4 to 5 ratio is that the remaining authorization from the 2024 AGM was just over 12,000,000 shares. The 2024 AGM granted two authorizations, one intended for the share issue and another for general purposes (including directed share issues such as special rights), similar to the 2025 authorization. The authorization covered 20,000,000 shares, of which 886,504 were issued in connection with a previous funding arrangement (IPF loan) and 6,976,744 were issued in the oversubscribed private placement in early 2025. Thus, 12,136,752 shares remained available under the authorization. The authorization would in any case have expired on June 30, 2025.

Conversion Price

The conversion price is adjusted if dilution occurs. The magnitude of any adjustment is expected to be modest because dilution would be limited given the current market capitalization. In practice, the conversion price is most relevant if Faron is acquired or enters into a lucrative partnership. Under the self-funding scenario outlined here the conversion price is not a significant factor.

The Cost of the Second Tranche Bond

If the second tranche bond is issued in connection with an equity raise, a portion of the authorization would be needed to settle conversions of the convertibles. The total amount depends on the exact timing of the second tranche issuance. Additional treasury shares would likely need to be issued to satisfy conversions before the 2026 AGM.

Depending on timing, there could be up to four scheduled payments before the end of April 2026. The nominal amount of these first four payments, including interest, is approximately €2,600,000. When settled in shares at a 10 percent discount this corresponds to about €2,900,000. The number of shares required to settle these conversions would exceed 2,000,000 only if the weighted average price used for calculating the discount is below €1.45.

In conclusion, issuing a further two million shares on top of the remaining 4,142,678 treasury shares (as of writing) should be sufficient to cover share settlements until additional authorizations are obtained.

Equity Headroom

Assuming the scenario outlined above, where the existing authorization is allocated as previously described for the second tranche bonds and related settlements, approximately 15,000,000 shares would remain available for issuance. This figure follows the earlier assumptions and reasoning on authorization usage, treasury share needs and timing in relation to the 2026 AGM.

Directed Issue

A directed issue of up to 15,000,000 shares would result in gross proceeds of €22.5 million to €37.5 million, assuming an issue price between €1.50 and €2.50. When combined with proceeds from the second and third tranche HCM bonds, total gross proceeds in this scenario would range from €41 million to €56 million.

Availability of such funding at the indicated valuations is uncertain. For it to be achievable, new large investors should participate as anchors and commit to meaningful allocations. In practice, this would require cornerstone orders that cover a significant share of the book and pricing that holds within the range of €1.50 to €2.50. Without new anchor demand, the terms might need to be adjusted or a broader public offer considered. The strong clinical results improve the prospects of attracting these investors, although the outcome will still depend on market conditions and on the credibility of the Phase III plan and timeline.

Public Share Issue

A public share issue would be detrimental to existing investors because the share price would likely move close to the offer price. Transaction costs would also be significantly higher. After the strong clinical results, the likelihood of this unfavorable outcome has arguably decreased. If Faron fails to attract a big pharma partner and to secure sizable equity investments, a public share issue could remain the only option.

Rights Issue

A rights issue is unlikely for the reasons set out above. Nonetheless, it remains possible, since there is now more time to prepare than last year. In theory a rights issue is preferable to a public offer because total shareholder value should remain unchanged. Value shifts from the share price to the tradable subscription rights, which can be sold or exercised to subscribe for new shares. In practice, however, the share price often trends toward the subscription price, especially when full subscription is uncertain or when overallotment options are available.

Extraordinary Meeting

If Faron proceeds with a large-scale share offering exceeding 15 million shares, an extraordinary general meeting would likely be required to approve additional share issuance. Additional authorizations could be sought in other cases as well, although the company has historically operated under authorizations granted by AGMs. To conclude, directed issues are expected to fit within the existing framework, while larger offerings, whether rights issues or public offers, would require further authorization.

Cash Balance

Faron will publish its H1 2025 report next week. The report will provide a clearer view of the company’s cash position. The only notable change to our cash balance expectation relates to the cash payment made toward the scheduled August installment of the HCM bond. The payment was approximately €1 million and, at the current burn rate, reduced the runway by less than a month.

The cash payment was interpreted as a sign that non-dilutive funding could be secured through a partnership with an upfront payment. Soon after that payment, HCM brought forward two additional installments totaling €1,682,067. Faron chose to settle these in shares at a subscription price of €1.96, which was a 10 percent discount to €2.18. If there had been firm confidence that a partnership with substantial upfront proceeds would be signed by year-end, there would have been little reason to convert the brought forward installments into shares. This sequence suggests the initial cash payment may have been a bluff intended to project confidence to the market and lift the valuation to limit dilution. HCM effectively called that bluff by advancing two installments that were then not settled in cash, since paying in cash would have shortened the runway by roughly one month.

If you are interested in biotech, you may like our earlier article where we derived market expectations for a Swedish biotech company called Diamyd using a martingale-based option pricing framework.

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance.

In this issue, we take a closer look at Hims’ Q2 2025 financial report. While top-line growth remains strong, a deeper dive reveals growing reliance on GLP-1 sales, softening core metrics, and signs of pressure beneath the surface.

GLP-1 Story Continues

Here are the key figures since Q2 2024:

Q2 2024:

GLP-1 revenue: $12 million

Total revenue: $325 million

Share of GLP-1 revenue: 4 %

Q3 2024:

GLP-1 revenue: $55 million*

Total revenue: $441 million

Share of GLP-1 revenue: 12 %

Q4 2024:

GLP-1 revenue: $162 million*

Total revenue: $488 million

Share of GLP-1 revenue: 33 %

Q1 2025:

GLP-1 revenue: $ 230 million

Total revenue: $596 million

Share of GLP-1 revenue: 39 %

Q2 2025:

GLP-1 revenue: $190 million

Total revenue: $545 million

Share of GLP-1 revenue: 35 %

* Estimate based on the $229M GLP-1 revenue for FY 2024

Revenue – Momentum Stalls Amid GLP-1 Reliance

Historically Hims has issued conservative guidance and then surpassed the top end of its range. This quarter, however, reported revenue landed about one per cent below the high end of management’s outlook.

GLP-1 sales reached $190 million, down from $230 million in Q1. The decline reflects the planned phase-out of commercially available semaglutide dosages. Management stated in Q1 that a “significant majority” of GLP-1 revenue came from personalized dosages. Provided that the phrase implies roughly 66–75 %, GLP-1 sales grew 10–25 % quarter-over-quarter in Q2. While many compounders have pulled back in the post-shortage environment, Hims appears to be doing the opposite, thereby strengthening its competitive position and attracting new customers to the platform.

Core revenue is under significantly greater pressure. It grew only 13 per cent year on year, compared with overall top-line growth of 73 per cent. Q2 core revenue of $355 million is virtually unchanged from the $356 million recorded in Q3 2024, underscoring a stagnating underlying business.

Year-on-year comparisons will become more demanding in the second half, because the Q3 2024 and Q4 2024 numbers are the first to include substantial GLP-1 contributions. As those figures roll into the denominator, headline growth rates are likely to decelerate even if absolute GLP-1 sales continue to expand.

Subscriber Base – Stronger Than Headline Numbers Suggest

Quarter-over-quarter net subscriber additions totalled 73 thousand, the smallest increase since Q4 2022. Beneath the headline, however, core subscriber growth was robust: the core subscriber base expanded by 132 thousand** to 2,158 million, the strongest quarterly gain since Q2 2024.

Had monthly average revenue per user (mARPU) held at Q1’s $84, Q2 revenue would have been 13 % higher at $615 million.

Average Revenue per User - Unexplainable Softness

The monthly average revenue per user (mARPU) experienced the steepest quarterly decline in company history, falling by $10 from $84 to $74. A degree of softness was expected, as the sale of commercially available GLP-1 dosages had to be discontinued following the end of the national shortage. This shift was known to impact GLP-1 revenue negatively, and by extension, lower the blended mARPU.

However, the scale of the decline significantly exceeded expectations. Even after excluding GLP-1 revenue, mARPU still dropped meaningfully, from $60 to $55. The conference call provided no clear explanation for this drop. It is unlikely that a single driver is to blame. Instead, it likely reflects a combination of product mix shifts and promotional pricing aimed at boosting retention.

It is also plausible that the strong growth in core subscribers was directly or indirectly linked to the lower mARPU, indicating that management was able to convert pricing pressure into volume gains. While that may have softened the revenue impact from lower mARPU, the sudden downturn is nonetheless worrying. If mARPU erosion were to continue, it would materially weaken customer lifetime value and undermine the company’s marketing-led growth model.

Customer Acquisition Cost - Through the Roof

Customer acquisition cost (CAC) climbed to a record high in Q2 2025. The company added just 73 000 net subscribers while spending $218 million on marketing—a marginal decline from $231 million in Q1. The sustainability of such elevated CAC is questionable, particularly if the recent softness in mARPU signals emerging price pressure in the core business.

It is worth noting that this quarter’s higher CAC partly reflects elevated subscriber churn following the end of the shortage. However, because GLP-1 customers generate roughly four times the mARPU of core subscribers, the outflow is modest in subscriber numbers but disproportionately large in revenue terms.

When eyeing marketing spend from a more forgiving perspective, expressed as a percentage of revenue, the figures appear relatively stable. Although, if Hims aims to become a compounder, marketing spend should meaningfully scale with revenue. Thus far Hims has shown no ability to achieve this. On the contrary, growth has become increasingly expensive with no improvement in sight.

Guidance – ZAVA Is the Saving Grace

Full-year 2025 revenue guidance was reinstated between $2.3 and $2.4 billion.

ZAVA Expected to Contribute $50 million in H2

ZAVA’s contribution is critical to meeting full-year guidance. Including the acquired ZAVA business without raising the overall target effectively amounts to a reduction in organic guidance. As a result, the implied organic guidance range for FY 2025 falls to $2.25 to $2.35 billion.

Assuming the $50 million ZAVA contribution is split across H2 as $23 million in Q3 and $27 million in Q4, the implied organic guidance for Q3 is between $548 million and $568 million. That equates to just 0,5 % to 4,2 % organic growth quarter-over-quarter—down sharply from the 73 % year-over-year growth seen in Q2, now expected to slow to 33 % to 38 % in Q3.

As GLP-1s are the only segment still growing, the guidance, in our view, indicates that both core revenue and core subscriber base are effectively guided to decline organically QoQ in Q3.

The lower end of the full-year guidance still looks attainable if the GLP-1 segment runs without disruption in H2. Figure 10 shows the quarterly CAGR needed to reach the effective organic guidance, starting from Q2, since H2 conditions are expected to mirror the post-shortage environment of that quarter.

Legal Risk - Novo Nordisk Holds All the Cards

Roughly 40 % of Hims’s revenue is tied to compounded semaglutide, whose sales may infringe Novo Nordisk’s patents. Liraglutide sales remain negligible as long as compounded semaglutide is widely accessible.

When the collaboration with Novo Nordisk was first announced Hims adopted a cautious approach to compounding. Yet in the weeks leading up to the agreement’s termination the company intensified its marketing of compounded semaglutide and has only accelerated those efforts since. The drug is now offered to virtually any customer, including first-time users who could not reasonably require a “personalized” formulation to mitigate side effects.

To hit its guidance Hims must keep driving compounded semaglutide, since it is resonable to expect the core growth to remain at a modest level. The dependence strengthens Novo Nordisk’s legal position if it chooses to take action.

Management Delivers What Management Is Incentivized to Deliver

The remuneration of the executive team is largely tied to annual revenue and adjusted EBITDA targets. As GLP-1s are practically the only segment driving growth and likely carry higher gross margins, they also make a disproportionate contribution to EBITDA. Promoting GLP-1s is therefore an obvious strategic focus for management. However, the ramifications for shareholders could be severe if the situation were to evolve in an unfavorable direction.

** Figures based on a monthly average price of $225

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance.

Background

Diamyd Medical is a Swedish biotechnology company dedicated to developing antigen‑specific therapies for type 1 diabetes. The lead asset is now being evaluated in a pivotal Phase III trial in stage three patients. An interim analysis, scheduled for March 2026, represents the most important near‑term value‑defining event for the company.

Funding

To finance the Phase III study, Diamyd completed a rights issue and directed share placement that raised SEK 267 million in gross proceeds. The transaction included the issuance of series TO5 warrants, each entitling the holder to subscribe for half of one new share at SEK 20 after the interim readout. Because the warrants mature only after the data cut‑off, they provide a contingent source of capital that becomes available if the study reads out positively. Access to this additional funding would leave Diamyd with a strengthened balance sheet and the financial flexibility required to pursue partnership discussions and prepare for commercialisation.

Key facts

Share count: 137 million

Outstanding series TO5 warrants: 34 million

Maximum new shares from warrants: 17 million

Maximum gross proceeds from warrants: SEK 336 million

TO5 subscription period: April 16 2026 to, and including, April 30, 2026

Key Assumptions & Parameters

Interim Readout Is Binary In Nature

DIAGNODE‑3 is a placebo‑controlled, randomised and double‑blinded Phase III trial that will enrol 330 patients, of whom the first 170 contribute to the interim analysis. The interim readout captures clinical status 15 months after the first injection, whereas the final analysis will add a further nine months of follow‑up.

Management expects the interim data to be sufficient for a biologics licence application (BLA). Success therefore requires a clinically meaningful and statistically significant improvement in stimulated C‑peptide versus placebo. A meta‑analysis of earlier data sets indicates that such an effect size should already be evident at the 15‑month mark. Anything short of a clear and statistically robust signal would be a major disappointment.

Failure at the interim would force a strategic reset of the entire development programme and would leave the company with limited cash runway. In that downside scenario we ascribe value only to the remaining SEK 150 million in cash and to the manufacturing plant, equating to roughly SEK 1,5 per share.

Conversely, if the interim readout delivers, the share price response will scale with the magnitude of the clinical benefit. Our valuation framework therefore models a symmetrical distribution around an average positive outcome. A convincing data set would lift the probability of ultimate regulatory approval to 90 % or higher.

Valuation Methods for the Warrants

Black-Scholes Framework

The Black‑Scholes framework is ill‑suited because its core diffusion assumption clashes with the Diamyd’s binary catalyst. Black‑Scholes prices options on the premise that the underlying share follows a continuous log‑normal path whose uncertainty accumulates smoothly through Brownian motion. In contrast, the interim readout creates a deterministic moment at which the price must jump either to a high “success” level or to a low “failure” floor. That discontinuity cannot be captured by a constant‑volatility diffusion, and the associated jump also invalidates the model’s delta‑hedging rationale, which relies on infinitesimal, hedgeable moves rather than step changes. Black‑Scholes would therefore misallocate probability mass and misstate time value, thus being unsuitable for this application.

Martingale Model

Instead of forcing continuity and diffusion where none exists, we adopt a martingale approach. The fundamental theorem of asset pricing tells us that in an arbitrage‑free market there exists a risk‑neutral measure 𝑄 under which all traded prices, discounted at the risk‑free rate, evolve as martingales. That result is model‑agnostic: it holds whether the underlying follows a diffusion, a jump process or, as here, a one‑off binary jump.

The martingale framework delivers risk‑neutral probabilities, not real ones. To arrive at an economic or clinical probability p we must undo the change of measure by inserting the asset’s real drift and the up & down factors that proxy volatility. This step re‑weights good and bad outcomes, restoring the risk premium that the market demanded and translating the q-probability into the real‑world probability p. We perform that transformation explicitly in later, allowing you to compare market‑implied risk perceptions with your own scientific or fundamental assessments.

Pricing the TO5 Warrant

We value the series TO5 warrants as a European call options on Diamyd’s share. Any dilution is already reflected in the stock price, and full exercise of all TO5 warrants would expand the share count by only approximately 10,9 %, a level that is nearly negligible.

Using a risk‑neutral martingale framework we calculate the current warrant price as follows:

Under the modelling assumptions the warrant has no value if the interim readout is negative. In a positive outcome the share price must exceed SEK 20, otherwise the funding outlook would remain uncertain and further dilution could not be ruled out. On that basis the expression simplifies to

Solving the equation across a range of post‑success share prices gives the corresponding risk‑neutral probabilities. The resulting pairs are summarised in the table below:

Deriving Market Expectations

The current share price can be viewed as the expected share price at warrant expiry, discounted back to today. In contrast to the warrant, the share retains residual value even in the negative outcome:

Together with the warrant‑pricing expression we now have two equations that pin down both the probability of a positive interim readout and the share price in that scenario. Expressing the risk‑neutral probability q as a function of the post‑success share price via the warrant equation yields:

Substituting this relationship into the share‑pricing equation and solving gives a closed‑form expression for the share price in the positive scenario:

Applying the input parameters produces a post‑success share price of SEK 34,25 and a corresponding risk‑neutral probability of 28,70 %.

What Do Future Price Movements Tell Us About Market Expectations?

If we hold either the share price or the warrant price fixed we can see how the market must adjust the risk‑neutral probability of success q and the post‑success share price​. Mathematically this amounts to taking the derivative of our valuation equations with respect to one variable while treating the other as a constant. The result shows how the two parameters must move to keep both instruments priced consistently.

The Warrant Appreciates While the Share Remains Constant

Let’s denote:

With these definitions the equations for the share and the warrant prices become:

Rearranging the share‑pricing equation gives q as a function of the share price in the positive scenario:

This gives us the following equation for the warrant price:

Substituting this result back into the warrant‑pricing equation and differentiating with respect to the post‑success share price yields:

The derivative is positive. A higher warrant price therefore requires a higher value for the share in the positive scenario if the share price itself has not moved. Conversely a lower warrant price forces the implied post‑success share price downward to maintain equilibrium.

Changes in Every Scenario

Much as we examined the warrant‑only move we can evaluate how each instrument must respond when the other variable changes. By applying the same differential approach we derive the market‑consistent shifts in the risk‑neutral probability and the post‑success share price for all four permutations:

Sensitivity Analysis

Changes in the risk‑free rate have only a marginal impact on the share price in the positive scenario and on the implied probability of success. However, the residual value of the share in the unsuccessful scenario materially shifts the parameters:

Translating Risk‑Neutral q Back to Real‑World p

The pricing analysis above yields a risk‑neutral success probability of 28,7 % This figure is mechanically low because, under the q‑measure, every cash flow is discounted at the risk-free rate. To obtain an economically meaningful probability we restore the risk premium that investors require. Concretely, we replace the risk‑free drift in the one‑step binomial tree with 13 % WACC, compute the implied growth factor and recalculate the up and down weights. This adjustment raises the success probability to approximately 34 %. The market is therefore signalling that roughly one interim readout in three would be strong enough to justify a share price of SEK 34,25. You can benchmark this assessment against your own view of the trial design, earlier data sets and historical success rates.

The move from q to p alters only the probability weights, not the terminal pay‑off levels, therefore the share price in the successful scenario stays the same. As a result the warrant’s attractiveness rests on two levers, namely investors’ confidence that the Phase III signal will beat market odds and the size of the share price jump if that scenario materializes.

Upside:

Downside:

Drift:

Expected growth factor:

Probability in the p-measure:

We can now derive the implied share price at warrant expiry to confirm consistency:

Discounting that value back to the present gives:

The result returns to the starting share price, confirming that the conversion from q to p is coherent with the observed market prices.

Conclusion

The market is currently pricing in a 34,1 % chance that Diamyd will deliver a positive DIAGNODE‑3 interim readout. In that success case the implied share price is SEK 34,25. This level represents a 197 % gain relative to today’s share price and about a 170 % gain to the price that a 13 % WACC implies for the stock immediately before the interim readout. Conversely, the model implies that an unsuccessful interim readout would lead to an 87% decline from today’s share price.

If the readout is positive Diamyd would hold roughly SEK 400 million in cash straight after the event. This cash balance equals about  2,60 per share before accounting for the few liabilities that the company holds. A share price of  34,25 would give Diamyd a market value of around SEK 5,3  billion which corresponds to approximately $550 million or €470 million.

These valuation markers appear conservative. They imply that investors could capture an attractive return even without staying in the position through the binary catalyst provided that sentiment strengthens as the readout date approaches.

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance.

Operational expenses are expected to continue rising, as the BEXMAB study remains ongoing until the latter half of H1 2026. The company has also continued to recruit professionals, most notably appointing Ralph Hughes as its new Chief Business Officer.

The Convertible Bonds Arrengement - Expensive Funding

In April 2025, Faron announced that it had entered into a convertible bonds arrangement with Heights Capital Management (HCM), the direct investment arm of Susquehanna International Group. Hereafter, HCM and other Susquehanna‑affiliated entities will be collectively referred to as “HCM.”

Background

Two months prior to the bond arrangement, Faron raised €12 million in an oversubscribed placing at just a 10,3 % discount to the previous day’s closing price, corresponding to a share price of €1,72. Before the placing, Faron’s cash reserves stood at just under €10 million, making the capital raise essential to fund the company through its upcoming top‑line readout.

The modest discount underscored Faron’s ability to attract significant financing with minimal dilution—a notable strength in today’s challenging biotech funding environment.

Issuance of First Tranche HCM Bonds

Only two months after the placing, Faron announced that it had entered into a convertible bond agreement and issued the first tranche, raising €13,875 million. The majority of the proceeds were used to repay a loan to IPF. The repayment, including early‐repayment fees, amounted to €9,1 million, thus extending the financial runway by only a few months.

Faron CEO Dr. Jalkanen commented on the arragmented, stating that foreign specialist investors are interested on the company with a grand vision and substantial invesment. Let’s review the terms of the arrangement to assess the accuracy of these statements.

The Terms of First Tranche Bond

Here are the key parameters of the first tranche bond:

Size: €15 million principal, issued at 92,5 % of par

Maturity: 2 April 2028 (three-year tenor)

Coupon: 7,5 % p.a.

Amortization: 18 equal instalments, beginning on June 2th 2025

Conversion price: €2,94 (20% premium)

Settlement: Cash or shares at 90% VWAP

Thus, at least 5,7 million shares is needed to pay back the bond if not converted. With weighted average share price of €2,50, the dilution effect would amount to 7,5 million shares, corresponding to a dilution of approximately 6,3 %.

Comparable Arrangements by HCM

HCM has funded numerous companies with similar vehicles priorly. Here are other arrengements to better understand Faron’s deal.

The majority of these deals have used the same basic structure, consisting of equal instalments—either in cash or shares—every two months.

1. Idex biometric

Norwegian biometric-sensor maker pursuing fingerprint cards for payments.

Size: NOK100 million principal, issued at 92 % of par

Maturity: 3,5 years

Coupon: 6 % p.a.

Conversion price: 25% premium

Settlement: Cash or shares at 90% VWAP

When: December 2023

2. Xbrane Biopharma

Stockholm‑based Xbrane produces low‑cost biosimilars; its first product, Ximlucy® (ranibizumab), is EU‑approved and awaiting FDA decision.

Size: SEK250 million principal, issued at 90 % of par

Maturity: 4 years

Coupon: 6 % p.a. (lowered to 0% upon FDA approval)

Conversion price: 25% premium

Settlement: Cash or shares at 90% VWAP

When: May 2023

3. Crossject

Crossject’s handheld ZENEO® devices deliver emergency drugs (e.g., midazolam for seizures) without needles.

Size: €7 million principal, issued at 90 % of par

Maturity: 3 years

Coupon: 7 % p.a.

Conversion price: 35% premium (with floor)

Settlement: Cash or shares at 85% VWAP

When: February 2024

4. Gensight Biologics

GenSight is trying to commercialise Lumevoq® for Leber hereditary optic neuropathy.

Size: €12 million principal, issued at 90 % of par

Maturity: 5 years

Coupon: 0 % p.a.

Conversion price: 30% premium

Settlement: Cash at 110% or shares at 90% VWAP

When: December 2022

5. Imugene

Sydney‑listed Imugene runs several Phase II oncology programmes (onCARlytics, VAXINIA, HER‑Vaxx).

Size: A$20 million principal, issued at par

Maturity: no fixed schedule

Coupon: 0 % p.a.

Conversion price: 25% premium

When: December 2024

6. Renalytix

US/UK AI-based kidney-risk diagnostics company.

Size: $21,2 million principal, issued at 85 % of par

Maturity: 5 years

Coupon: 5,5 % p.a.

Conversion price: 20% premium (with floor)

Settlement: Cash or shares at 85% VWAP

When: March 2022

7. Abivax

Abivax is developing obefazimod, an oral miR‑124 modulator, for ulcerative colitis and Crohn’s disease.

Size: €35 million principal, issued at par

Maturity: 4 years

Coupon: 6 % p.a.

Conversion price: 30% premium

Settlement: Cash or shares at 90% VWAP

When: August 2023

Faron’s Deal in Comparison

The interest rate for Faron is among the highest in the group. This is despite ECB’s interest rate being lowest since December 2022.

Similarly, the conversion price implies only 20 % premium—on par with the weakest in the group. The conversion price is arguably the most critical parameter, as it materially affects shareholder upside in a positive scenario.

Stock performances since HCM deal

1. Idex biometrics

Stock price, prior to announcement, on 22.12.2023: 146,34

Stock price on 22.7.2025: 3,33

Return since HCM deal: -97,72%

Annualized return: -90,83%

2. Xbrane Biopharma

Stock price, prior to announcement, on 19.05.2023: 45,84

Stock price on 22.7.2025: 0,29

Return since HCM deal: -99,37%

Annualized return: -90,22%

3. Crossject

Stock price, prior to announcement, on 26.02.2024: 4,14

Stock price on 22.7.2025: 1,60

Return since HCM deal: -61,35%

Annualized return: -49,22%

4. Gensight Biologics

Stock price, prior to announcement, on 22.12.2022: 3,41

Stock price on 22.7.2025: 0,13

Return since HCM deal: -96,19%

Annualized return: -71,76%

5. Imugene

Stock price, prior to announcement, on 28.01.2025: 1,33

Stock price on 22.7.2025: 0,32

Return since HCM deal: -75,94%

Annualized return: -94,88

6. Renalytix

Stock price, prior to announcement, on 30.03.2022: 270,00

Stock price on 22.7.2025: 7,25

Return since HCM deal: -97,31%

Annualized return: -66,42%

7. Abivax

Stock price, prior to announcement, on 18.08.2023: 17,10

Stock price on 22.7.2025: 8,90

Return since HCM deal: -47,95%

Annualized return: -28,72%

Bonus: Faron Pharmaceuticals

Stock price, prior to announcement, on 02.04.2025: 2,73

Stock price on 22.7.2025: 2,32

Return since HCM deal: -15 %

Annualized return: -41,4 %

Conclusion:

Average return: -82,3%

Average annulized return: -70,29%

Median annualized return: 71,76%

HCM offers predatory loan arragments that make creating shareholder value extremely difficult. The dilution can quickly trigger a downward spiral—diluting existing shareholders further and putting additional pressure on the share price as HCM liquidates newly issued shares. Correspondingly, Faron’s share price experienced an initial negative reaction of –9  % on the day the arrangement was published and has since followed a similar trajectory to its peers.

Dr. Jalkanen described HCM as foreign specialist investors who invested in Faron with high conviction and major weight. However, given HCM’s track record, the firm has not spotted nor targeted future prospects. HCM’s playbook appears to center on targeting distressed companies that struggle to secure external funding and are consequently forced into bond arrangements with highly unfavorable terms for shareholders.

It’s worth noting that the biotech sector has endured significant challenges since 2021. Nonetheless, the outcomes for HCM‑backed financings remain markedly worse than the broader industry over the same period.

Does HCM Go Down alongside Other Shareholders?

Although shareholders have endured significant losses in the peer group, HCM emerges largely unscathed. The bond arrangements are structured to protect HCM: in Faron’s case, HCM may accelerate up to two payments, with up to nine payments during the first year. If a negative event threatens Faron’s ability to raise fresh capital, HCM can secure its investment before the situation worsens. Moreover, when repayment is made in shares, those shares are issued at a 10 % discount—enabling HCM to liquidate at or above the instalment value even in challenging market conditions.

Why Did Faron Enter into Such an Unfavorable Agreement?

Just two months earlier, Faron had raised approximately €12 million in gross proceeds through a significantly oversubscribed placing at only a 10,3 % discount to the previous day’s closing price, corresponding to €1,72 per share. The transaction is highly comparable to the first‑tranche bond, which generated €13,875 million in proceeds, only 15 % more.

Comparing the First Tranche Bond to a Directed Issue

Had the €13,875 million been raised via a directed issue at the same 10,3 % discount, it would have implied a subscription price of €2,45 and the issuance of approximately 5,66 million new shares. Such predictable dilution would have been particularly valuable, given how costly the bond arrangements have proven to be for peer companies in terms of shareholder dilution.

The total cost of the first‑tranche bond amounts to €16,781 million. To match that dilution if settled in shares, the weighted‑average share price over the payback period would need to be €3,33. Immediate conversion at the €2,94 strike would generate approximately 5,10 million new shares. However, if the share price remained at €2,30 throughout the payback period, dilution would rise to about 8,11 million shares—43 % more than comparable directed issue.

The dilution has no upper limit. The company could opt to make payments in cash if the share price is unfavorable. However, this doesn’t solve the problem, as the company is dependent on external funding, the cost of which in dilution terms depends on the share price.

Could a Directed Share Issue Have Been Possible?

The earlier directed share issue was executed at a considerably lower valuation. Does this imply that investors were no longer willing to fund the company at a higher valuation, or was a second directed issue just two months later neither financially nor allocation‑wise feasible? Alternatively, would two such placings in quick succession have been perceived negatively? In any case, bringing in external, non‑strategic investors immediately before pursuing a transformative partnership raises valid questions.

The Possibility for Further Funding

At first glance, it might appear that Faron entered into the HCM agreement primarily to secure subsequent bond financings, thereby creating a continuous funding runway, reducing uncertainty, and supporting the share price. However, the need to issue the second‑tranche bond actually signals a negative outcome rather than stability.

Further Funding

If a partnership deal is within reach, an agreement is likely to materialize only after the study design—and therefore the costs—of the pivotal Phase III trial have been finalized, which would push it into mid‑2026. Alternatively, Faron could elect to self‑fund the Phase III study, a path we believe is feasible. Read more about this possibility in our earlier issue here.

The capital required to extend the financial runway by three to six months is approximately €5 million to €10 million. Visibility into the burn rate and current cash reserves will improve once the company publishes its H1 2025 report in August.

Here are the two main options for the company:

1. Secure More Funding via a Directed Issue

A directed issue would signal confidence from existing shareholders and, in our view, enhance the likelihood of business‑development progress.

2. Issue The Second Tranche Bond

The second‑tranche bond would provide an immediate liquidity infusion of €9,25 million, extending the runway by 5–6 months. However, it imposes highly unfavorable terms on existing shareholders—amplifying those seen in the first tranche. Moreover, once the second tranche is issued, the third tranche effectively becomes a call option for HCM, sidelining existing shareholders.

Terms for Second Tranche Bond

To be eligible for the second‑tranche bond, Faron must satisfy the following conditions:

1. Phase II topline readout in respect of its BEXMAB r/r MDS Study indicates an objective response rate of at least 60 per cent

   The ORR achieved was 63 %, so Faron has met this requirement.

2. The arithmetic mean of the daily traded value of the Shares on each dealing day comprised in the three-month period preceding the issuance of the Second Tranche Bonds is greater than EUR 500,000

   This ensures sufficient market liquidity so that any share‑settled payments can be liquidated promptly. This term will not pose an issue since the stock is highly liquid.

3. The Company has a market capitalisation greater than EUR 200 million on the date of issuance of the Second Tranche Bonds.

   Market capitalization is calculated based on outstanding shares, excluding any treasury shares. Consequently, market cap will rise as the company makes tranche‑related share payments, even if the share price remains constant. To satisfy the €200 million market‑capitalization requirement for a second‑tranche bond issuance in H2 2025, Faron’s share price would need to exceed €1,75.

Possible Overhang Effect

If the issuance of the second‑tranche bonds becomes imminent and the stock trades near the threshold, there is a possibility of an overhang effect on the share price. Uncertainty regarding funding could trigger anxiety among investors until the company secures additional financing. Should the share price fall below the threshold, it could exacerbate downward pressure, as the risk of a financing crisis intensifies when one option appears unavailable.

What Happens If Faron Is Not Eligible For the Second Tranche Bond?

In that scenario, HCM would hold all the negotiating power and could demand extra assurances—such as equity investments from other parties. We believe this outcome would significantly increase the likelihood that Faron opts to self‑fund its Phase III study. However, it is also possible for HCM to waive the condition without futher drama.

The Caveat Regarding the Issuance Of The Second Tranche Bond

If Faron issues the second‑tranche bond, HCM would then have the unilateral right to trigger the third‑tranche bond under the agreed terms. The conversion price for the third tranche would be set at a 20 % premium to the lowest daily VWAP over the six trading days preceding issuance. Effectively, this grants HCM a call option exercisable during the 12‑month period starting six months after the second‑tranche issuance. The value of this option is substantial, further constraining upside potential for ordinary shareholders. We will provide a more detailed analysis should Faron proceed with the second‑tranche bond.

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Convertibles - Debt in Name Only

As we have seen, the convertibles will result in significant dilution and are highly likely to be settled in shares at a discount, making them essentially equivalent to equity‑based financing arrangements. Therefore, when estimating the company’s per‑share value via discounted cash flow analysis, these convertible bonds should be incorporated by upfronting the dilution. This can be done conservatively by assuming conversion at the current share price. In scenario‑based analyses, more granular assumptions may be applied.

Until the business generates cash flow, cash payments effectively translate into share issuance, since dilution is the only way for the company to raise cash for now. Treating these convertibles as debt in valuation therefore results in per‑share targets that are systematically too high.

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance.

In this report, we discuss the latest news regarding the dispute with Novo Nordisk. We explore the strategic choices that culminated in the partnership’s premature end, and consider what happens next.

Novo Nordisk News

The decision by Novo Nordisk to terminate its agreement with Hims & Hers took many investors by surprise. However, there were early signs, indicating potential headwinds within the agreement.

Following the deal announcement, Hims launched an intensive campaign for Wegovy that ran for several weeks before the company shifted its focus. On June 9, Hims rolled out a 20 % discount on compounded semaglutide. We’ll explore the strategic rationale behind that promotion in more detail later, but this aggressive push may well have been the final straw prompting Novo Nordisk to terminate the agreement.

The significance of the deal for Hims was never in the sales: Wegovy was never going to contribute more than 1-2 % to Hims’ revenue. The real benefit for Hims was the elimination of the litigation risk. Arguably the chance of Novo suing its long-term partner was 0,00 %.

Novo x Hims Long-term Collaboration

Once the deal was announced, Hims launched a brand new website highlighting the possibilities of long-term collaboration between the companies. Hims bulls envisioned a future where Hims serves as a link between cash-paying customers and Big Pharma. The collaboration was supposed to pave the road for further collaborations with other BP-companies - and it was completely sensible to think so at the time.

In losing Novo as a partner, Hims forfeited far more than a single co-marketing agreement; it effectively closed the door on any comparable partnership in the foreseeable future. Hims also revealed its playbook when it comes to partnerships:

1. Form a partnership with Big Pharma to distribute branded medicine

2. Leverage the partner’s intellectual property in marketing

3. Offer customers legally compounded alternatives at a significantly lower cost.

4. Gradually cease promotion of the branded product

5. Use the branded offering as a reference point to highlight cost savings on the compounded version

But what drove management to take this route? When the deal was announced, investors expected that Hims had already agreed to drop compounding in order to secure the deal. The future prospects, elimination of litigation risk and access to Novocare were arguably worth enough to give up most of the compounded GLP-1 revenue which amounted $230 M in Q1 2025. To understand the choice, we first need to examine the state of Hims’ core business before the deal.

Hims’ Revenue - Not a GLP-1 Story?

Hims would be barely growing if it wasn’t for GLP-1s.

While the subscriber base has grown steadily, the recent spike is almost entirely attributable to GLP-1 uptake. Below are Hims’ GLP-1–related revenue and subscriber figures since the launch in Q2 2024. We assume that the monthly average revenue per user (mARPU) remained constant at $225.

Q2 2024:

GLP-1 revenue: $25 M*

Total revenue: $325 M

Share of GLP-1 revenue: 8 %

Q3 2024:

GLP-1 revenue: $50 M*

Total revenue: $441 M

Share of GLP-1 revenue: 12 %

Q4 2024:

GLP-1 revenue: $150 M*

Total revenue: $488 M

Share of GLP-1 revenue: 31 %

Q1 2025:

GLP-1 revenue: $ 230 M**

Total revenue: $596 M

Share of GLP-1 revenue: 39%

Q2 2025:

GLP-1 revenue: $175 – 198 M***

Total revenue (estimate): $550M (top end of guidance)

Share of GLP-1 revenue: 32 % – 36 %

* Estimate based on the company’s disclosure of $225 M in GLP-1 revenue for FY 2024

** Reported in the Q1 2025 earnings release.

*** Hims reported that a “significant majority” of the $230 million in Q1 2025 GLP-1 revenue derived from “personalized doses”—we estimate this to be in the 66–75 percent range. Furthermore, fueled by an aggressive Q2 marketing push, we project this segment expanded by roughly 15 percent quarter-over-quarter.

At present, GLPs contribute approximately a third of Hims’ revenue.

However, GLP-1 business is the only part that is growing anymore.

Subscriber Base - Flat Without GLP-1s

Similarly to revenue, GLPs have been the only component contributing to subscriber growth. Excluding GLP-1, the subscriber count has remained virtually unchanged since Q3 2024.

However, it’s important to recognize that the subscriber base naturally declines over time due to churn. A relatively high attrition rate is to be expected in this business—patients improve and may no longer require treatment. Although Hims doesn’t disclose its churn metrics, we believe its retention performance is at least on par with, if not superior to, industry peers. Consequently, maintaining a stable subscriber count requires a steady stream of new subscribers.

However, the company is finding this increasingly difficult. Its core business is either losing subscribers or attracting few new subscribers—likely a mixture of both—and as a result, the company is reliant on the GLP-1 business.

Marketing - Just Accelerate Marketing to Keep the Core Growth Afloat?

Hims’ business is all about marketing. Marketing is a true operating expense for Hims since pausing marketing would result in an immediate effect on the subscriber base.

Since the subscriber growth outside of GLPs has been close to flat in recent quarters, one could approximate the minimum marketing spend required to keep the subscriber base flat. We’ll come back to it in upcoming issues.

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Marketing efficiency is typically assessed via Customer Acquisition Cost (CAC)—total marketing spend divided by the number of new customers acquired. Hims’ CAC has risen steadily over time. That said, because the denominator reflects net subscriber gains (after accounting for churn) rather than gross new sign-ups, the measured CAC overstates the true cost of acquiring each customer.

Improved customer retention helps offset the rising CAC: by delivering tailored, personalized solutions, the company has demonstrably strengthened subscriber retention.

However, far more important has been the increase in monthly Average Revenue Per User driven by compounded semaglutide. Together with their superior margins, GLP-1s represent an exceptionally lucrative segment for Hims, even amid intensifying competition.

As shown above, mARPU has remained relatively flat once the GLP-1 effect is excluded.

Core Business Deceleration’s Impact on the Novo Nordisk Deal

Now that we’ve established the underlying weakness in Hims’ core business, let’s revisit the Novo Nordisk agreement and unpack why management followed the course they did.

Hims entered Q2 2025 and full year 2025 with very ambitious guidance. The Q2 outlook of $530 – $550 million implies robust growth, once you factor in the loss of commercially available doses of semaglutide.

It’s plausible that, at the deal’s inception, management believed branded Wegovy could scale meaningfully on the Hims platform. However, within two weeks they likely recognized its limitations: at $599 per month for a six-month subscription, Wegovy simply couldn’t move at the volume necessary to hit those targets. Faced with underwhelming branded Wegovy sales figures despite heavy marketing support, management appears to have pivoted aggressively toward the only lever still capable of hitting guidance—compounded semaglutide.

Critically, the core business offered no safety net. With non-GLP-1 subscribers flat or contracting, a continued slump there would have dragged overall results into negative territory. Thus, the management was left with a choice: either revise guidance or double down on compounded semaglutide.

Litigation Risk

The decision carries significant litigation risk, as compounding semaglutide at scale may violate regulatory and patent restrictions. No longer confined to exceptional clinical scenarios, personalized doses are now broadly available to practically anyone. Moreover, the company is actively marketing these compounded formulations to individuals with no prior GLP-1 treatment history.

Novo Nordisk has already initiated more than 120 lawsuits against compounders. Hims’ sole potential defense is its emphasis on “personalization,” a rationale that the other compounders cannot invoke.

Predicting whether Novo Nordisk will pursue legal action is inherently uncertain. However, as of this report, the Kalshi market implies a roughly 46 % probability that Novo will sue Hims by year-end. While that market is notably illiquid, the signal is unambiguous: Hims faces a meaningful risk of litigation.

What if Novo Does Sue?

If Novo Nordisk initiates legal action, Hims & Hers would incur substantial legal expenses, weighing on its GAAP results for years to come. A victory for Hims would set a dangerous precedent—effectively legitimizing its “personalization” defense as a loophole to circumvent patent and IP protections. Such an outcome could destabilize the pharmaceutical patent framework and likely trigger congressional or regulatory intervention, although Hims would be free to continue compounding semaglutide at scale for at least a while.

Conversely, if Hims loses, it would almost certainly have to abandon its compounded semaglutide business—the one segment fueling recent growth. That scenario could slash revenue by about one-third and drive mARPU down by roughly 35 %. In turn, these impacts would likely push Hims back into negative GAAP free cash flow for FY 2025—and, depending on the timing of any settlement, potentially into FY 2026 as well.

Mitigating the Impact of a Potential Loss

Hims has already faced the threat of losing a large segment of its subscriber base. In May 2025—once the semaglutide shortage ended—Hims was forced to halt sales of commercially available semaglutide dosages.

At that time Hims had several options available to retain the vast majority of the at-risk subscribers by offering:

1. “Personalized” doses of the same drug

2. Branded version of the same drug at NovoCare prices (from $599/month)

3. Generic liraglutide

4. Oral medications

Most subscribers likely migrated to “personalized” compounded doses, as they could continue using their prepaid commercial supply until it ran out. By allowing customers to accumulate up to a 12-month supply, Hims spread the revenue impact over an extended period—yet this also meant that only a small fraction had the chance to even consider branded Wegovy.

Generic liraglutide offers little appeal to patients, given its requirement for daily injections and premium price point (from $300/month). The drawbacks mean that Hims isn’t able to sell liraglutide at scale.

If Hims were forced to discontinue its “personalized” semaglutide offering, its retention toolkit would narrow to:

1. “Personalized” doses of the same drug

2. Branded version of the same drug at NovoCare prices (from $599 a month)

3. Generic liraglutide

4. Oral medications

The only realistic alternative would be oral medications. To secure conversion rates anywhere near those seen with commercially available semaglutide, Hims would need to offer substantial discounts. Even then, it’s unlikely to retain more than a fraction of its estimated 340,000 personalized-dose subscribers as of Q1 2025.

The hit wouldn’t stop there. Since the company spent a significant sum to acquire these customers in the first place, it would mean the GLP-1 marketing budget delivered a negative return on investment. The high CAC isn’t justifiable if there’s even the slightest chance of complete churn among the “personalized” semaglutide subscriber base.

The marketing spend on branded Wegovy likely manifested mainly in “personalized” semaglutide sales, so the contract termination did not have a similar impact.

New Verticals Are Urgently Needed

It’s possible that the current growth hiccup is merely temporary, pending the launch of the new TRT and HRT product lines later this year. For Hims to sustain its growth narrative, these launches must succeed—but their revenue won’t flow through until 2026, meaning they won’t bolster FY 2025 results.

Likewise, the gummies introduced in June represent a solid strategic fit, yet their contribution will be immaterial relative to the company’s broader growth objectives.

In the next part, we’ll explore:

• Valuation

• Executive compensation

• Q2 results

• Marketing spend

• and much more

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Thank you for reading!

If you have any questions or feedback, please feel free to leave a comment below.

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The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance.

A partnership agreement alone does not generate value at this stage; it is simply one financing avenue among many. Last year, in conjunction with the offering, Faron indicated that it would require partner resources to execute Phase III. Over the past year, however, Faron’s market valuation has increased by more than 2.5×, meaning the company now possesses the capacity to self-fund Phase III through equity raise(s).

The cash cost of Phase III remains constant in euros, whether funded externally or internally. Yet the true cost can also be expressed in terms of dilution. Last summer, approximately €30 million was raised at a roughly 30 % discount to TERP—a highly successful outcome.

Today, a comparable transaction securing €40 million in gross proceeds could almost certainly be executed at a €1.50 subscription price, which—assuming a €2.30 share price—equates to an approximate 40 % discount to TERP. This would necessitate issuing roughly 27 million new shares, representing under 20 % dilution for existing shareholders.

CEO Mr. Jalkanen and the Faron team have demonstrated a solid track record of successful capital raises, and this transaction might not require costly underwriting commitments; it could proceed smoothly on its merits. By pursuing this course, Faron would:

1. Advance rapidly into Phase III without partner-related delays, thereby creating intrinsic value; and

2. Retain full commercial rights

Negotiating a partnership could extend over several years, postponing market entry and reducing the net present value of future cash flows for shareholders. In the Nordics alone, numerous firms have a Phase III–ready asset but are still waiting for a partner. For instance, Initiator Pharma in Denmark has been engaging potential collaborators since its Phase II study concluded in 2023. To retail investors in Finland, Faron appears as a guiding beacon in the morning mist—yet to large pharmaceutical companies, it remains merely one of many prospects. Moreover, Faron’s Phase II study will not report for several months, so the true waiting period has yet to commence.

A key differentiator for Faron is its independence: the company is not reliant on an external partner and could self-finance the Phase III study. This advantage may not endure indefinitely since Faron is no longer the “lean, mean, killing machine” as Dr. Jalkanen described the company following last year’s cost-cutting measures.

Cash burn is accelerating once again, and scrutiny of the balance sheet will intensify as further funds will likely be required, even if a partnership is secured. Of the HCM top-up bonds, the first issuance condition has been narrowly satisfied, but the remaining two conditions rest entirely with market performance:

a) A Phase II topline readout for the BEXMAB r/r MDS study indicating an objective response rate ≥ 60 %
b) A three-month average daily trading value of the shares exceeding €500,000 prior to the second-tranche bond issuance
c) A market capitalisation > €200 million on the date of issuance of the second-tranche bonds

Given typical market volatility, there is a material risk that Faron’s market capitalisation could dip below €200 million when additional funds are required. Acting promptly to minimise this uncertainty is therefore prudent. Upon a successful €40 million raise, the market cap would remain above €200 million, securing funding through the Phase III interim readout—assuming any outstanding HCM bonds are redeemed as needed.

Current market terms for a potential partnership would likely include:
• Costs shared on a 50/50 basis
• A $50 million upfront payment
• Up to $600 million in milestone payments
• 10 % royalties

Potential partners are not modelling a > 60 % Likelihood of Approval (LoA); their assumptions are conservatively lower. Given today’s market environment, superior deal terms are unlikely, while small biotech firms line up seeking collaborations.

Consequently, Faron’s valuation expectations and those of potential partners may not align—another rationale for self-funding Phase III. Once interim data are available, visibility will improve, transforming forecasting from art into science as uncertainty diminishes.

Following a successful interim readout, the intrinsic value created would allow Faron to negotiate substantially enhanced terms—potentially doubling every financial parameter—while partner interest would surge. Shareholders would realise significant value creation and wealth generation.

Total dilution from a €40 million equity raise plus two HCM bond issuances would amount to approximately 27 M + 5 M + 5 M = 37 M new shares, or 24 % dilution. On a risk-adjusted basis, long-term value creation would be compelling, even if the share price experiences short-term pressure.

We look forward to hearing more from the company. Has the Board revisited the financing strategy since last summer? Does it genuinely believe that partnering—amid what may be the weakest market in a decade—offers the optimal path to maximise shareholder value under the current—undeniably favourable—capital-raising conditions?

The information presented in this blog is provided solely for educational and informational purposes and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. The views expressed are those of the author and may change without notice. You should not rely on this content as the basis for making any investment decision, and nothing herein guarantees future performance of any market or security. The author is not a regulated financial advisor or any other licensed financial services provider. Prior to taking any action, you are strongly encouraged to conduct your own research and seek guidance from a qualified financial professional who can take into account your individual circumstances and risk tolerance.