Shares of Sucampo Pharmaceuticals (NASDAQ: SCMP) dropped over 20% as of 2:45 p.m. EST Tuesday after the company announced its intention to sell $225 million in debt notes. An option to sell an additional $33.75 million in debt would bring the total gross proceeds to roughly $259 million.
Mr. Market appears to be overreacting in a big way. The net proceeds from the $225 million being raised will be used to pay off existing debt, which totaled about $219 million at the end of September. Any remaining funds will be added to the company's cash position (increasing the importance of the additional option), which totaled about $128 million at the end of September.
In other words, Sucampo Pharmaceuticals isn't doubling its current debt level. Investors should instead think of this transaction as a refinancing of debt -- trading debt due in the near future for debt due at a later date, or sometime in 2021 to be exact. It's a good, albeit relatively neutral, financial move.
Investors could also view Tuesday's 20% drop as Mr. Market giving back some of the gains from the announcement of third-quarter 2016 earnings. Sucampo Pharmaceuticals stock rocketed higher in mid-November on updated guidance and the announcement of a long-awaited settlement with Dr. Reddy's Laboratories. So even with Tuesday's plunge, shares are up about 20% from early November levels.
Sucampo Pharmaceuticals looks to continue growing sales and profits for the foreseeable future with two fast-growing products on the market. That should make it easier to pay back the new debt notes before they come due in 2021. If you liked the company before Tuesday's announcement, then know that nothing material has changed.