Why Did Puma Biotechnology Dilute Shareholders?

By Markets Fool.com

Early-stage biotech companies commonly sell more shares in order to raise capital. After all, when you're pouring money into research and development but don't yet have a product approved to generate revenue, your hands are often tied. While investors don't like to see their slice of the profit pie shrink, secondary offerings are a necessary evil in the biotech world.

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Learn more through the example of Puma Biotechnology (NYSE: PBYI) in this clip from Industry Focus: Healthcare.

A full transcript follows the video.

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Kristine Harjes: Onerecent secondary offering that wasannounced in the healthcare world was that ofPuma Biotechnology. OnOct. 18, after the closing bell, they announced that they wanted to raise $150 million, and potentially another $22.5 million on top of that because of some technicalities with the people who underwrote the shares. They could technically have the option to buy them within 30 days, if they want. So, this was aninteresting situation because Puma,right now, has this one drugcalled Neratinib. It's a breast cancer drug. If you were listening to this show yesterday, by the way, it's an HER2-positive breast cancer drug, which is a target thatI was just talking about with Vince on theConsumer Goodsshow yesterday. Anyway, you have this drug, and it's under FDA review right now; the decision should come out in about mid-2017.

Gaby Lapera:That means they're still testing the drug?

Harjes:That means the trials haveeither largely wrapped up, orthat they have enough that they could submit it to the FDAwith what they have right now. The FDA is sitting on theinformation, they have the application,and they have a certain amount of time to actually accept or deny the drugthe right to be marketed.

So, anapproval, as you likely know, would send shares of this company higher. If youthink about how the mechanicsof shareholder dilution and secondary offerings work, youwant to wait until you have that higher share price before you go out and sell more shares,because you make more money. But they don't really haveenough time left, with the cash that they have, to wait for an actual approval. So, they had to do this now. And I think it's probably a smart move. They canhit the ground running; they can get ready for the launch. But shares did sink 18%,even before the price of this new, secondary offering was announced.

Since this announcement came out, shares have been slipping and slipping even more. Ultimately, shareholders were diluted about 15%, and thecompany got the money that they need. So, I think that's a fairly typical way you'll see secondary offerings and shareholder dilution in the biotech world. You have these companies that aren't making with the money with the drugs yet, because they're not approved yet, so they need to make money somehow.

Gaby Lapera has no position in any stocks mentioned. Kristine Harjes has no position in any stocks mentioned. The Motley Fool has 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.