Here's Why Syros Pharmaceuticals Is Collapsing Today

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What happened

Shares of Syros Pharmaceuticals (NASDAQ: SYRS) fell more than 26% today after the development-stage company announced the pricing of a stock offering. The business will sell roughly 8.7 million shares of common stock at $7.50 per share, in addition to warrants allowing the purchase of additional shares of common stock in the future. All of the transactions are expected to raise approximately $70 million in gross proceeds.

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The dilution will sting shareholders, but management is wisely taking advantage of the fact that shares had gained 75% from the beginning of 2019 to the time the share offering was announced. That means fewer shares can be issued to raise more capital as compared to an offering at a lower share price. Considering the early-stage nature of the company's pipeline and the fact the business reported an operating loss of $64 million in 2018, it was a well-timed move in the grand scheme of things.

As of 1:20 p.m. EDT, the stock had settled to a 24.3% loss.

So what

Syros Pharmaceuticals is developing a pipeline of drug candidates aiming to safely and predictably control the level of gene expression as a way to treat disease. For example, certain cancer cells might overexpress a gene that allows them to elude the body's immune system, but it might be possible to force cancer cells to return to a more "normal" profile of gene expression and thus make them susceptible to the immune system and/or other cancer drugs.

It's an intriguing idea but one that has mostly led to disappointing results to date. Researchers still don't have a great understanding of the complex networks cancer cells use to communicate, which makes it unlikely that targeting a single gene or protein will have much of an effect. That won't stop Syros Pharmaceuticals from testing its novel technology platform, which will be a little easier to do following the latest capital raise. The $70 million in gross proceeds will be added to an end-of-year cash balance of approximately $100 million in 2018.

Now what

Syros Pharmaceuticals stock is down today in response to the expected dilution from a share offering. Increasing the number of shares outstanding makes each share less valuable. That said, it's a wise move by management, especially considering the stock's impressive rise so far in 2019 and a slew of ongoing clinical trials. But given the uncertainty of the company's approach to controlling gene expression and a lack of successful results, investors are better off steering clear of this early-stage pharma altogether.

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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.