Why Oncomed Pharmaceuticals Inc's Share Price (but Not Its Valuation) Plummeted Today

By Markets Fool.com

Continue Reading Below

Image source: Getty Images.

What: OncoMed Pharmaceuticals (NASDAQ: OMED) is down 14% at 12:42 p.m. EDT after announcing the pricing of its secondary offering this morning.

So what: Yesterday, the development-stage biotech announced plans to raise capital through a secondary offering, and by this morning, OncoMed already had investors lined up to buy the shares. Typically, that kind of quick turnaround is a good sign that there are large investors looking to get large blocks of shares, which is easier to do in a secondary offering than on the open market.

Instead, it appears investors were quickly stepping up to buy shares because of the discount OncoMed was offering. The deal was priced at $10 per share, almost 15% lower than where it closed yesterday.

While that's not the worst discount we've seen this year, OcoMed's shares have been as high as $23.98 within the last year. Raising near that price would have diluted shareholders substantially less. As it is, OncoMed sold 5.5 million shares, adding to the 30.67 million shares the biotech already had outstanding.

Continue Reading Below

OncoMed will net about $51.4 million in the deal, adding to the $171.5 million it had in the bank at the end of the second quarter. There's potential for the investment bank to sell another 825,000 shares, which could add another $8 million or so.

Now what: Secondary offerings are nothing new to biotech. It's very rare that a biotech can go from IPO to profitable without ever raising additional capital. Investors just have to hope that management raises the capital at successively higher valuations, reducing the impact of the dilution.

Rather than looking at the share price, investors should focus on the market cap of the company, because that will ultimately determine the return from here until OncoMed gets a drug on the market. Based on the new share count -- being conservative assuming the overage is also sold -- OncoMed has a market cap of about $370 million, which is actually slightly more than the approximately $359 million market cap OncoMed closed at yesterday.

OncoMed is cheaper when you subtract out the cash, referred to as the enterprise value, but since the new cash will be spent long before OncoMed is profitable, investors are rightfully discounting most of it.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early, in-the-know investors! To be one of them, just click here.

Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.