Why Medgenics Inc.'s Shares Are Down Big Today

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What: Shares of Medgenics , a clinical-stage biotech focused primarily on gene therapy, are down by more than 13% as of 11:30 a.m. EDT on the news that the company is raising capital through a common stock offering.

So what: Medgenics is expected to raise about $20 million by selling 3,640,000 shares of its common stock to the public for a price of $5.50 per share. Underwriters of the deal also retain the option to purchase an additional 546,000 shares, which could push the total proceeds from the deal up to $23 million. If that happens, this offering could dilute current shareholders by nearly 13%.

The $5.50 share price represents a sharp discount to yesterday's closing price of $6.24, which is probably the main reason why shares are getting slammed today. The deal is expected to close later this week.

Now what: Last quarter Medgenics produced a net loss of more than $11 million, and its cash balance fell to only $43.8 million. If this elevated level of spending persists, this company could find itself out of capital in less than a year, so investors shouldn't be all that surprised to see a capital raise. That's especially true when you consider that Medgenics recently kicked off enrollment in its phase 2/3 clinical trial testing the ability of its compound NFC-1 to treat mGluR-mutation-positive attention deficit hyperactivitydisorder (ADHD), which will likely cause spending levels to continue to climb throughout the remainder of the year.

Medgenics could also be responsible for making a multimillion-dollar payment to its Japanese partner Kyowa Hakko Kirin in 2017, if the company exercises its option to license Kyowa's anti-LIGHT monoclonal antibody. A phase 2 study is currently underway testing the anti-LIGHT antibody's ability to treat severe pediatric-onset inflammatory bowel disease. If all goes well, Medgenics believes this could be a $300-million-plus opportunity, so exercising the option down the road could make a great deal of financial sense.

Medgenics' technology and opportunity look quite promising, but there are still a huge number of hurdles to overcome before this company starts to generate meaningful revenue from its pipeline. I'd advise potential investors to approach this company's stock with a great deal of caution.

The article Why Medgenics Inc.'s Shares Are Down Big Today originally appeared on Fool.com.

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