Why XenoPort, Inc. Shares Tanked Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of XenoPort , a biopharmaceutical company focused on developing therapies to treat neurological disorders, tanked as much as 13% during the trading day after disclosing that it had completed a convertible senior note offering.

Source: XenoPort.

So what: Last week XenoPort announced that it would be pricing $100 million worth of 2.5% convertible senior notes due in 2022 that, with the over-allotment option exercised by its underwriters, could yield the company $96.8 million in net proceeds after taxes and fees. The initial conversion price whereby shareholders can turn these notes into shares is $10.72, or 93.2945 shares per $1,000. However, should XenoPort undergo a "fundamental change" as the press release describes it, XenoPort would be required to purchase the notes back at 100% of the principal amount, plus accrued and unpaid interest leading up to the repurchase date in 2022.

The proceeds from the offering will be used to further the commercialization of restless leg syndrome drug Horizant, for the clinical development of XP23829 for patients with moderate-to-severe chronic plaque-type psoriasis, and for general corporate purposes.

Now what: Simply put, the reason for today's drop is the anticipation of dilution at some point in the future. Typically biopharmaceutical companies who are primarily clinical in nature will turn to common stock offerings in order to raise cash to conduct ongoing research and development. Often times this takes the form of an upfront common stock sale. In the case of XenoPort it offered convertible notes which can either be held by investors at 2.5% per year through 2022, or can be converted at $10.72 per share. If or when these shares are converted it'll dilute existing shareholders and could place an upside cap on XenoPort's share price around that mark.

On the flipside, XenoPort does need the cash, and a convertible offering is usually a smarter way to spread out the pain of a cash raise for investors. At the moment, Horizant sales really aren't anything to write home about despite their 177% year-over-year sales improvement in the third-quarter. The drugs' current annual sales run rate of $22.4 million just isn't enough to excite investors. The real excitement here is built around XP23829, which could have a sizable market if approved. Understandably, there's still a long way to go to develop efficacy of the experimental psoriasis therapy, but this is the one to watch if you want to have a good idea of where XenoPort is headed over the long run.

The article Why XenoPort, Inc. Shares Tanked Today originally appeared on Fool.com.

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