Here's Why Axovant Gene Therapies Dropped as Much as 16.6% Today

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What happened

Shares of Axovant Gene Therapies (NASDAQ: AXGT) fell more than 16% today after the company announced the pricing of a stock offering. The gene therapy developer will sell up to 30.7 million shares of common stock at $1.50 apiece, which could raise gross proceeds of up to $46 million. If the offering is completed in full, then the company's outstanding share count would increase by about 20%.

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While the dilution will sting shareholders, issuing stock to raise money is a common feature of early-stage biopharma companies that need incredible amounts of capital to develop a drug pipeline. The proceeds from the offering will pad a balance sheet that entered 2019 with $84.9 million in cash and cash equivalents.

As of 10:45 a.m. EDT, the stock had settled to a 14.3% loss.

So what

Dilution aside, the share offering is a wise move by management. Axovant Gene Therapies stock had gained 75% since the beginning of 2019 thanks to investor enthusiasm for any and all things related to gene therapies and early updates from two clinical programs that excited Wall Street earlier this week.

But the reality is that the company's pipeline is still years away from commercializing any of its drug candidates -- if it even harbors a successful product. Additionally, the recent update from the clinic included partial data from just three patients. Therefore, it was a little too early for individual investors or analysts to get that excited, but taking advantage of a lofty stock price to raise capital is a smart thing to do.

Now what

There's not much shareholders can do about the stock offering. It's a common way for companies that have few other sources of income to raise capital. Axovant Gene Therapies will likely use it again, judging by the early-stage nature of its pipeline. And the company's shares will likely be volatile throughout 2019 so long as gene therapies are an attractive investment theme.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.