Sesen Bio (NASDAQ:SESN) is a small biotech company attempting to develop a drug it calls Vicineum. SESN stock plunged last month after hitting a massive regulatory setback.

Sesen’s Vicineum aims to treat unresponsive non-muscle invasive bladder cancer using a locally administered recombinant fusion protein method. However, the Food and Drug Administration (FDA) issued Sesen a complete response letter (CRL). This CRL stated that the FDA could not approve Vicineum in its present state and that more trials and clinical data would be needed before the FDA’s opinion could change.

Sesen’s CEO stated that he was disappointed with the decision and the potential impact it could have on patients with this form of bladder cancer. The firm intends to meet with the FDA to try to find a path forward. Still, it’s not looking great for Sesen. SESN stock is off over 75% from where it traded prior to the FDA decision.

What Happens After a Drug Fails

It’s possible that Sesen’s drug will get back on track and eventually receive FDA approval. However, investors should be prepared for the worst case outcome.

So what happens if a small biotech firm’s lead drug doesn’t work? This is a common occurrence in biotech investing, given the vagaries of the drug approval process.

At this point, investors tend to price the company around the value of its net cash position. Unless there is another strong drug in the pipeline that can soon get to a data readout, cash is the main metric investors will give them firm credit for. That’s certainly true for Sesen, which was a make-or-break bet on Vicineum. Indeed, a look at the company’s pipeline shows nothing beyond Vicineum in various combinations.

Sesen’s Balance Sheet

Still, Sesen might seem to have a shot. It is carrying $151 million of cash as of its June 2021-ended quarter. Assuming Sesen reduces its corporate overhead given the FDA rejection, that cash should last a long time. As it stands today, the company rolls in the mid-$20 million range for operating expenses, so $151 million is a significant sum of cash.

However, don’t forget to overlook the firm’s total balance sheet. The company has $160 million in contingent considerations which show up as a liability on the balance sheet. In the event that the drug succeeds, Sesen would likely owe this money, thus reducing its overall valuation.

On financial website screeners, you may see Sesen listed with a negative book value due to this outstanding liability. However, in the increasingly likely scenario that Vicineum doesn’t make it to market, this liability shouldn’t be a major concern. Stated another way, Sesen’s cash position is largely unencumbered and should allow the company to function for awhile.

That said, the company did include a going concern warning in a recent filing, noting that: “[S]ubstantial doubt exists about the Company’s ability to continue as a going concern”. While it has considerable financial resources for now, ultimately Sesen needs a viable path at a commercial product to maintain investor interest and establish access to new sources of funding.

SESN Stock Verdict

One other point to consider is in Sesen’s short interest. As of this writing, more than 10% of the company’s float has been sold short. In theory, this could set off a dramatic short squeeze. Perhaps the Reddit and meme stock traders could give SESN shares new life.

In practice, however, this is fairly unlikely. Numerous biotech companies see their lead drugs fail, and few become retail trader darlings. It’s not easy to get folks to latch onto an intangible story like a biotech company as opposed to more palpable concepts such as retail stores or restaurants. It’s one thing to get fired up about movie theaters or video game stores, but a bladder cancer drug is less immediate.

Sesen isn’t going out of business tomorrow. It has nearly 75 cents per share in cash, which should provide a solid floor to the stock price for now. But unless a short squeeze hits, there’s little reason to recommend SESN stock at this point. It will be years, if ever, before Vicineum heads to a commercial launch given the recent FDA ruling.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.