Here's Why EyePoint Pharmaceuticals Saw Its Share Price Drop Today

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What happened

Shares of EyePoint Pharmaceuticals (NASDAQ: EYPT) are down 16.7% at 11:34 a.m. EDT after the company announced a secondary offering of a little over 10.5 million shares at $1.90 each.

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With shares closing yesterday at $2.21, a drop today was nearly inevitable. If large institutional investors who typically buy secondary offerings are only willing to pay $1.90 per share, why would retail investors pay more?

So what

EyePoint will get approximately $20 million for selling the shares before expenses. The underwriters have a 30-day option to buy an additional $3 million worth of stock, which could boost the capital raised.

Investors should have seen the raising of capital coming given the company's relatively short cash runway. EyePoint ended 2018 with $45 million in the bank and added approximately $11.4 million as part of a draw on a debt facility it set up in February. Earlier this month, it said that cash plus the amount remaining on the credit facility would be enough to get EyePoint through the rest of this year.

While investors might not have been expecting the secondary offering this early in the year, the added cash could provide EyePoint some flexibility. In February, the company launched Yutiq for the treatment of an eye disease called chronic non-infectious uveitis. And a month later, EyePoint launched Dexycu for the treatment of post-operative inflammation following cataract surgery. The added cash could help EyePoint take advantage of opportunities to step on the gas during the launches, which could get it to profitability quicker.

The downside of doing a secondary offering now is that if the launches of Yutiq and Dexycu go decently well, EyePoint's share price should rise, and the company could raise the same amount of cash selling fewer shares, which would reduce the dilution for current shareholders.

Now what

While the secondary offering should help with EyePoint's drug launches, there are no guarantees that the launches will go well enough to get the drugmaker to profitability before it runs out of cash and has to go back to the well -- perhaps at an even lower share price, substantially diluting current shareholders.

Until the company reports a couple of quarters of sales to see how the launches are going, EyePoint is really only appropriate for the most risk-tolerant investors.

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Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.