Why Ultragenyx Pharmaceutical Inc. Stock Slumped

Ultragenyx shares aren't looking so "ultra" today after the company announced its intention to sell shares of common stock. Find out what this means for investors.

Jul 8, 2014 at 2:04PM

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 Ultragenyx Pharmaceutical (NASDAQ:RARE), a clinical-stage biopharmaceutical company focused on developing therapies to treat rare and ultra-rare diseases, slumped as much as 12% today after Ultragenyx announced after the closing bell Monday its intention to offer stock for sale.

So what: According to a press release issued late Monday, Ultragenyx will sell 1,311,277 shares of its common stock, while an additional 706,072 shares will be offered by selling stockholders for a total underwritten offering of 2,017,349 shares. In addition, the offering's underwriters will have the opportunity to purchase up to 302,602 shares of common stock. Ultragenyx won't receive any proceeds from its selling stockholders, but based on its current price would net roughly $54 million in gross proceeds from the sale of its 1.3 million shares. Ultragenyx plans to use the proceeds to advance its existing clinical and preclinical pipeline, as well as investing heavily in early stage research.

Now what: This is the downside to investing in wholly clinical-stage companies: any sizable rally in share price can result in management capitalizing on padding their cash balance by offering common stock for sale. This offering is only going to increase Ultragenyx's outstanding share count by a little more than 4%, so today's reaction lower may be a bit overdone. However, as I pointed out last week, Ultragenyx's pipeline is comprised of a handful of early stage candidates, and placing a $1.25 billion valuation on a pipeline this wet behind the ears probably isn't prudent, no matter how attractive orphan-disease drugmakers might appear. This is a biopharmaceutical company I'd suggest you monitor from a safe distance.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, 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 don't 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.

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