Why Shares of Synta Pharmaceuticals Corp. Sank Today

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 the clinical-stage biopharma Synta Pharmaceuticals dropped by nearly 20% today on high volume after the company announced a secondary offering of22,000,000 shares of its common stock at a price to the public of $1.75 per share.

This public offering will generate gross proceeds of approximately $38.5 million for the company and is expected to close on April 6, 2015. However, Synta is granting the underwriters a 30-day option to snap up a whopping 3,300,000 additional shares.

So what: Dilutive financing deals like this one are part and parcel of the biopharma landscape, especially among small, clinical-stage companies. Even so, they do have a dramatic effect on share price, shown by today's action.

Now what: Synta's future hinges on the results of the pivotal late-stage trial, GALAXY-2, for its experimentalheat shock protein 90 inhibitor,ganetespib, indicated as a potential treatment fornon-small cell lung cancer. If this trial yields positive results, Synta's lead clinical candidate would probably go on to become a major revenue driver for the company, especially given that it is presently being tested in several additional trials as a broad-based cancer treatment.

That said, investors should keep in mind that heat shock protein 90 inhibitors don't exactly have a confidence-inspiring track record when it comes to pivotal late-stage trials.

Although next-generation therapies like ganetespib might have what it takes to break through on this front, the market clearly isn't optimistic -- assigning the drugmaker a sub-$300 million market cap despite owning a coveted late-stage oncology asset. So, you may want to play it safe with this one, sticking to the sidelines until the company's platform is further along in development.

The article Why Shares of Synta Pharmaceuticals Corp. Sank Today originally appeared on Fool.com.

George Budwell has no position in any stocks mentioned. 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.