Here's Why Tiny Biotech Ardelyx Saw a Big Decline Today


Shares of Ardelyx (NASDAQ: ARDX) got smacked down 19.5% on Tuesday after announcing that it was raising cash two different ways after the bell yesterday.

Perhaps the biotech would have only been down half as much if it had just stuck with one capital-raising endeavor.

So what

First, Ardelyx said it raised $50 million through a loan from Solar Capital Ltd. and the Life Sciences Group at Bridge Bank that was funded last week. The capital doesn't come cheap, with an interest rate of 7.45% plus the 30-day LIBOR, which sits at almost 2% right now. The loan isn't due until late 2022, giving Ardelyx some time to get its lead drug approved and start generating revenue.

While loans don't dilute shareholders like secondary offerings, they're more detrimental for shareholders if things go south because they're typically, as in this case, secured loans, meaning the creditors get their cut before shareholders. Essentially, the loan makes Ardelyx more risky with a potentially higher return for current shareholders if its drug has success on the market and Ardelyx can pay off the loan.

Ardelyx also announced that it plans to raise $50 million by selling shares through a secondary offering, with the potential to sell another $7.5 million if the underwriters exercise their option to purchase additional shares.

It's more than 24 hours after the announcement, and Ardelyx hasn't announced a price for the secondary offering, suggesting that large investors who typically buy these offerings aren't chomping at the bit to own the biotech.

Secondary offerings typically price at a discount to the closing price prior to the announcement, but now, potential buyers of the secondary are likely to factor in today's closing price, resulting in more shares needing to be sold to raise the same amount of capital.

Now what

Ardelyx ended the first quarter with $127 million in the bank, which is a decently sized nest egg. But with plans to submit a marketing application to the FDA for tenapanor to treat irritable bowel syndrome with constipation in the second half of this year, it'll need the funds for a potential launch next year. Ardelyx also needs to fund its phase 3 trial testing tenapanor as a treatment for hyperphosphatemia, or high levels of phosphate, in patients with end-stage renal disease who are on dialysis.

For now, there isn't much investors can do but wait and see where the secondary offering prices and hope Ardelyx can turn the capital into a higher valuation, making investors' diluted piece worth more.

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