Having your shares in a company heavily diluted by a big secondary share issue is often scary for investors. It's easy to see why; if a company dumps a bucket of new stock on the market, existing shareholders' slice of the pie gets smaller. Their piece of the business is reduced by the incoming stock.

This dilution is about to happen with a clinical-stage biotech that's currently a market favorite -- gene therapy specialist Spark Therapeutics (NASDAQ:ONCE), which just announced another major share flotation expected to close on August 9. Yet, buoyed by several other pieces of news, the stock has been on a tear the last few days. Investors don't seem worried at all about the new issue, and I think there's good reason for that.

Accentuate the positive

Spark Therapeutics is issuing just over 4.6 million shares of newly issued common stock at $76 per share. That should reap gross proceeds of around $330 million. At the moment, the company's market capitalization stands at just over $2.4 billion. So, assuming investors snap up the issue, the number of outstanding shares will expand by almost 15%.

Two lab workers stand side by side, holding a beaker and a test tube as they work with compounds.


This isn't the first time Spark Therapeutics has tapped the market for fresh capital. Just over a year ago, it floated a similarly sized issue of 3.5 million shares, and in December 2015 it sold 3 million shares. In both instances, the company's share price understandably dropped. Who's a fan of stock dilution, after all?

But, it soon became obvious that the money would be going to a company on the rise, and the shares recovered. Spark Therapeutics' initial secondary stock issue in 2015 was launched in the wake of two pieces of good news. The company announced that it had secured a $15 million milestone payment from development partner Pfizer, and the stock was named to the Nasdaq Biotechnology Index.

The 2016 share issue was announced concurrently with the publication of encouraging results for a pair of hemophilia treatments the company is developing. Several days later, Spark reported that its leading drug candidate Luxturna, aimed at treating inherited retinal disease, performed well in a phase 1 clinical trial. 

The announcement of the upcoming 2017 share issue came after the company unveiled Q2 results that revealed a cool $1.5 million in quarterly revenue from Pfizer -- much higher than the expected $1 million. Better yet, Spark released preliminary data from a recent clinical trial showing very encouraging results for one of its hemophilia drug candidates. 

The only spot of bad news that day was Spark Therapeutics' net loss, which at over $74 million, or $2.40 per share, was significantly deeper than the average analyst estimate of $1.74. But, we should keep in mind that bottom-line results for clinical-stage companies can vary wildly from quarter to quarter, so it's not unusual for analyst projections to be far off.

The general impression of the company's operations was clearly positive, as evidenced by the stock's nearly 20% pop on the day earnings were announced.

Clear vision

Investing in clinical-stage biotechs is always risky; even if a promising treatment does well in clinical trials, there's no guarantee that it will win FDA approval. And even if that occurs, it doesn't necessarily mean that the treatment will be marketed successfully.

Bearing that firmly in mind, Spark Therapeutics looks like one of the better emerging biotech bets at the moment. Its revolutionary gene therapy platform aims to replace faulty genes with normal ones in order to treat some of the most devastating diseases out there. Luxturna, in particular, could become a blockbuster if it's approved in the U.S. come January 2018 and has been awarded orphan drug, breakthrough therapy, and rare pediatric disease designations by the FDA. Meanwhile, the company has other promising candidates in its pipeline, notably one that targets the rare genetic eye disease choroideremia.

Developing cutting-edge drugs is not easy, quick, or cheap. Clinical-stage biotechs have limited revenue sources and thus need a source for ready capital like the stock exchange. Given Spark Therapeutics' strong prospects and the fact that it's successfully gone down this road before, I think investors shouldn't fear this new share issue and the resulting dilution at all. The company is looking like a potential big winner.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.