What happened

Shares of Strongbridge Biopharma (NASDAQ:SBBP) dropped 20% this morning after the rare-disease therapeutic developer announced the pricing of a share offering. The company will sell 4 million shares, and potentially up to 4.6 million shares, priced at $6.25 apiece. That marks a sharp discount to yesterday's closing price of $7.50 per share. It will also increase the number of shares outstanding (also known as dilution) by 13%. 

The company will use what's left of the $25 million in gross proceeds to expand the commercialization of its marketed drug Keveyis, continued development of two pipeline drug candidates, and general corporate expenses. Overall, it's a smart move by management, especially considering the stock has more than tripled in 2017. As of 11:59 a.m. EDT, the stock had settled to an 18% loss.

A businessman holding his hand out flat with a red bar chart showing losses hovering over it.

Image source: Getty Images.

So what

While the price drop as of this writing is larger than the dilution (in theory, they would be about equal), Strongbridge Biopharma won't come close to covering its financial obligations for very long with the capital raise. Consider that the company began the year with $67 million in cash, but burned through half of that in the first half of the year. That could be the reason for the disconnect between the price drop and dilution percentages -- i.e., Wall Street knows there will be more dilution in the future.

As it ramps marketing activities for Keveyis, which is approved in the United States for primary periodic paralysis, investors can expect cash burn to increase. The drug was purchased from Taro Pharmaceutical Industries late last year after being written off as a market flop. Approved in summer 2015 and once expected to generate $60 million in annual sales, it made only $1.5 million for Strongbridge Biopharma in the second quarter of 2017 -- the drug's first quarter following a strategic "relaunch." Sales should grow from that level, but the original expectations may never be realized. 

Now what

Keveyis expansion will accelerate the company's cash burn for the next several quarters. Add in the development of the small-cap biopharma's two pipeline drugs, in phase 2 and phase 3, and costs should continue to trek higher for the foreseeable future. That said, Strongbridge Biopharma has turned quite a few heads with its strategy, which has allowed it to claw its way from a micro-cap stock to a small-cap stock. While it does have interesting, albeit limited, potential, the company has a lot to prove to investors right now. Keep that in mind when evaluating the stock.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.