Zogenix Soars 10% Today Despite Diluting Investors

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What happened

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After the company announced it will tap investors for money to fuel R&D (research and development) and pre-commercialization efforts for its Dravet syndrome drug, shares in Zogenix (NASDAQ: ZGNX) are rallying 10% at 2 p.m. EDT today.

So what

Zogenix rolled out impressive phase 3 study data last week, showing its ZX008 can significantly reduce the number of monthly seizures in people diagnosed with Dravet syndrome, a rare form of child-onset epilepsy.

Dravet syndrome patients receiving ZX008 saw the average number of monthly seizures fall by 72%, compared to just a 13% decline in seizures for patients receiving a placebo. The findings were particularly encouraging because the safety profile appears OK, with the rate of severe adverse events being similar between the ZX008 and placebo cohorts.

The positive data sent shares soaring higher, and on Monday, management announced it will tap into investor enthusiasm to solidify its balance sheet. The company will offer 4.3 million shares for purchase, plus an additional 645,000 shares to cover any overallotments associated with the stock offering.

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Now what

A second phase 3 trial of ZX008 in Dravet syndrome should read out data early next year; if it's also positive, then Zogenix plans to file for approval from the U.S. Food and Drug Administration. In the meantime, the company is planning to begin enrolling another phase 3 trial evaluating ZX008 in Lennox-Gastaut syndrome, a more common form of childhood-onset epilepsy. Wins in both Dravet syndrome and Lennox-Gastaut syndrome would position the company to compete against GW Pharmaceuticals (NASDAQ: GWPH), a drugmaker working on marijuana-based treatments for epilepsy.

GW Pharmaceuticals has reported positive phase 3 outcomes for its cannabidiol drug Epidiolex, in both Dravet syndrome and Lennox-Gastaut syndrome, and an FDA filing should happen soon. In its trials, Epidiolex reduced monthly seizures from baseline by about 40%.

Zogenix hasn't announced pricing for its stock offering yet, but the money that's raised will go toward R&D, preparation for a regulatory submission, and prelaunch commercial efforts.

While Dravet syndrome is uncommon, the broader epilepsy population is a billion-dollar market. If Zogenix can demonstrate ZX008 is effective in various forms of epilepsy, it could wind up with a big seller on its hands.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.