Why Puma Biotechnology Inc. Sold Lower Today

By Brian OrelliMarketsFool.com

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What happened

Puma Biotechnology (NYSE: PBYI) is down 18% at 12:45 p.m. EDT today after announcing a secondary offering of shares yesterday after the bell.

So what

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Puma Biotechnology is looking to raise $150 millionselling shares, which will dilute current shareholders. Another $22.5 million of shares could also be sold within 30 days if the underwriters want the extra shares.

Secondary offerings are often a double whammy for a company's share price. Often -- although not always -- large investors who buy the shares want a discount to the current share price. And second, current investors are being diluted, so they now own a smaller piece of the pie, making their shares worth less.

A price for the secondary offering hasn't been set yet, but investors are taking the potential for a discount into consideration in valuing shares today. The secondary offering didn't close overnight, which sometimes happens when there's high demand for shares, so investors are likely a little nervous that the discount may be steep.

Sometimes the timing of a secondary offering can be telling of management's expectations. Puma's marketing application for its breast cancer drug neratinib is under review at the Food and Drug Administration and European Medicines Agency. It seems likely that Puma's share price will be higher if neratinib is approved, which would cause less dilution for shareholders.

But, in this case, Puma Biotechnology needed to raise capital ahead of a decision. It ended the second quarter with $57.8 million in cash and equivalents and $85.9 million of marketable securities. Based on the $65.8 million the biotech burned through in the first half of the year, waiting for approval to raise capital would be cutting it close. With the money raised, the company can use the cash to get ready to launch and hit the ground running when the drug is approved.

Now what

Investors who have been looking to purchase shares ahead of an FDA decision next year can get shares on sale today, although it might be prudent to see where the secondary offering prices before buying in. Today's decline may be unnerving for current investors, but it shouldn't have a big effect on the share price after the approval, which is all long-term investors should care about.

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Brian Orelli and The Motley Fool have 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.