What happened

Shares of pre-revenue biopharma Idera Pharmaceuticals (NASDAQ:IDRA) sank as much as 35% this morning after the company announced the pricing of a major public stock offering. The company will issue over 33 million shares at $1.50 apiece and offer up to an additional 5 million shares at the same price point. 

The financing will add net proceeds of $46.8 million. While that's a sizable amount and will prove useful in efforts to further develop its lead oncology drug candidate, it also represents sizable dilution for existing shareholders. The number of shares outstanding will increase by a whopping 26% when the offering closes.

As of 11:27 a.m. EDT, the stock had settled to a 28.9% loss, which brought shares roughly in line with the $1.50 offering price.

A business man holding his hand out flat, while a bar chart showing losses is hovering over it.

Image source: Getty Images.

So what

Idera Pharmaceuticals was founded all the way back in 1989, but it hasn't found success in the clinic in the last 28 years. Despite its lousy track record, investors have found a few reasons for optimism with the company's more recent focus on developing immunotherapy and RNA-based therapies for oncology and rare disease indications, respectively. Recent cash injections have shown that management is serious, and today's capital raise, although painful, is the latest sign.

That's a good thing, because the pipeline is going to need a lot of cash. 

Idera Pharmaceuticals' approach in oncology centers on using toll-like receptors (TLRs) to trigger immune responses within tumors and provide a boost to biologic drugs already on the market. The biopharma's most advanced clinical program is a phase 2 trial investigating the potential to treat metastatic melanoma with a combination therapy comprising its lead drug candidate, the TLR known as IMO-2125, and the checkpoint inhibitor branded as Yervoy from Bristol-Myers Squibb. Early results were promising, but only evaluated nine patients, which makes it difficult to draw too many conclusions. 

There are several other ongoing early-stage trials in oncology and rare diseases, including a partnered program with GlaxoSmithKline using RNA-based drug candidates to treat renal diseases.

Now what

Massive dilution is never a good thing for shareholders, but it's not too uncommon in early-stage biopharma. Running multiple clinical trials is expensive, and since Idera Pharmaceuticals owns full commercial rights to all of its oncology programs, it has to foot the entire cost of development. That could pay off if the company finds success in the ongoing phase 2 trial in metastatic melanoma, allowing it to court a partner on favorable terms or even go it alone in phase 3 to score an even bigger win if the drug candidate succeeds in a late-stage trial.

For now, it's too early to tell how this will shake out. A market cap of just $280 million shows that Mr. Market is waiting for phase 2 results before he pays too much attention to Idera Pharmaceuticals. Individual investors may want to do the same.

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