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What: Shares of Raptor Pharmaceuticals , a biopharmaceutical company primarily focused on treating rare and debilitating diseases, sank as much as 11% in Tuesday's trading session before finishing the day down 9.7% after announcing a common stock offering after the closing bell on Monday.
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So what: According to Raptor Pharmaceuticals' press release on Monday afternoon the company is commencing an underwritten offering totaling $75 million worth of common stock, with an additional 15% allotment of shares available for the underwriters up to 30 days from the date of pricing the offering. To be clear, Raptor hasn't said what share price the offering will be at as of yet, but based on today's closing price the implication would be about 6.9 million shares. Not surprisingly, this would increase Raptor's outstanding share count by roughly 10%, thus the equivalent 10% drop in its share price.
Now what: What we're seeing here is a very common reaction to a capital raise for predominantly clinical-stage biotech companies. Because research and development costs often exceed product sales for early stage biotech companies, they're often limited in ways that they can raise cash. Forming collaborations or taking out a line of credit are two of the lesser common ways small-cap biotech stocks raise cash. The more common method is issuing common stock which raises the desired funds but also dilutes existing shareholders.
Although it wasn't mentioned in the press release, I'd presume this capital raise is being done to further the development of RP-103 as a potential treatment pediatric non-alcoholic fatty liver disease/non-alcoholic steatohepatitis, and to potentially boost the marketing budget for Procysbi, its Food and Drug Administration-approved nephropathic cystinosis drug.
I believe the cash raise was a necessary move when taking into account that RP-103 is moving into costlier late-stage studies in a couple of its proposed indications. If RP-103 winds up being a success Raptor could be healthfully profitable and potentially a bargain by the end of the decade -- but that's a big "if" right now. For the time being I'm perfectly content suggesting investors hang out on the sidelines and wait for RP-103s late-stage data to roll in before placing your bets.
The article Why Raptor Pharmaceutical Corp. Shares Cratered 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.