Why Concert Pharmaceuticals Inc. Shares Were Hammered

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Concert Pharmaceuticals , a clinical-stage biotechnology company developing a wide array of small molecule drugs to treat everything from nervous system disorders to cancer, sank nearly 11% during Thursday's trading session after announcing a public offering before the opening bell.

So what: According to Concert Pharmaceuticals' press release, it agreed to sell 3.3 million shares of its common stock at $15.15 per share, an 8.5% discount from yesterday's closing price. The expected net proceeds from the stock sale will be approximately $46.7 million, with a 30-day option available for the underwriters to purchase up to an additional 495,000 shares of common stock. Presumably, the offering will be used to fund ongoing research and development.

Source: Concert Pharmaceuticals.

Now what: What you're witnessing here is one of the biggest dangers of buying clinical-stage biotechnology stocks: dilution. Because clinical-stage biotech companies have few ways of generating cash (i.e., licensing deals or collaborations), they often turn to common stock offerings in order to raise money. Unfortunately for existing shareholders this winds up diluting the shares they already own. For instance, the 3.3 million share offering will increase Concert's outstanding share count by a whopping 18% -- and it could even be higher if the underwriters exercise their buy option. In other words, shareholders should probably be thankful that Concert only shed 11% when the outstanding share count is moving higher by 18%!

The good news is that after taxes, Concert should have in excess of $120 million in cash and cash equivalents, basing this number on the $79 million it had in cash and cash equivalents as of its most recently reported quarter. With operating cash flow of negative $30 million over the trailing 12-month period, this would imply that Concert probably has a three or four year cash runway to develop its pipeline.

My personal opinion is that Concert is nothing more than a radar stock at the moment. Even though it's likely solved its interim cash concerns, and it does have a handful of drug development partners, its most advanced partnered product, AVP-786, is being targeted a major depressive disorder and Alzheimer's disease -- two indications where the failure rate for clinical drugs is pretty high. I'd rather hang out on the sidelines and wait for positive data and/or a decision from the Food and Drug Administration than be caught on the wrong side of bad clinical data.

The article Why Concert Pharmaceuticals Inc. Shares Were Hammered originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.