What happened

Shares of small-cap biopharma Viking Therapeutics (NASDAQ:VKTX) fell over 17% on Thursday after the company announced fourth-quarter and full-year 2017 earnings yesterday afternoon. As a pre-revenue company, there wasn't much to report on the income statement. However, in recent months management has taken advantage of a soaring stock price to raise $78 million in gross proceeds through multiple share offerings. 

Those moves significantly strengthened the balance sheet, but at the expense of epic dilution. Viking Therapeutics had just 27 million shares outstanding at the beginning of the fourth quarter of 2017. Today there are almost 51 million shares on the market. That dilution was necessary, but did sap returns for investors. Just six months ago the company had a market cap of less than $30 million, compared to over $250 million today, an increase of 733%. Shares are up 355% in that span.

In other words, big drops like today -- in the absence of any negative news -- are simply Mr. Market keeping the market cap at more reasonable levels until the company delivers on its potential. As of 11:58 a.m. EST, the stock had settled to a 7.5% loss.

A businessman holding his hand out with a stock chart showing losses hovering over it.

Image source: Getty Images.

So what

Viking Therapeutics will certainly need a lot of cash going forward to fund the development of five drug candidates in its pipeline. That includes VK5211, which successfully wrapped up a phase 2 trial as a potential treatment for patients recovering from surgery to repair hip fractures, and VK2809, which is currently enrolling patients in a phase 2 trial investigating its potential to treat non-alcoholic fatty liver disease. There are several other early stage and preclinical trials in the hopper, too.

Development expenses will rise sharply in 2018 as lead programs mature and more early stage studies are initiated. Judging by the market's reaction in the last year, investors will happily take on higher costs for the chance at a bigger win.

Now what

It's not unusual for micro-cap biopharma stocks that enjoy overnight success to subject shareholders to increased volatility. So although Viking Therapeutics took advantage of its rising stock price to raise much-needed funding, and Mr. Market is largely pleased with progress in the last year, today's drop is simply keeping the market cap in check until the company delivers on its potential.

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.