What happened

Shares of Verastem (NASDAQ:VSTM) are plunging today, down 11% as of 11:53 a.m. EDT, after the company announced that it sold 7,777,778 shares at $4.50 per share in a secondary offering, a substantial discount to yesterday's closing price of $5.24.

Man with clinched fists stares at monitors with stock charts

Image source: Getty Images.

So what

Shares of Verastem have been on a tear over the last week for no apparent reason, which likely explains why management decided to raise capital. The higher the selling price, the less current investors are diluted.

VSTM Chart

VSTM data by YCharts.

The secondary offering will gross Verastem $35 million with the possibility of raising another $5.25 million if the underwriters use their option to purchase additional shares. The company ended the first quarter with $64.2 million, having burned through about $22 million during the quarter. Verastem also raised about $22 million by selling shares directly into the market at the beginning of this quarter, helping to further pad its coffers, albeit at the cost of additional dilution.

Now what

Raising capital through dilution is a necessary evil of drug development, because it takes a lot more money than most companies can get in their initial public offering to get a drug to market.

Fortunately, Verastem is in the home stretch, having recently submitted a marketing application for its blood cancer drug, duvelisib, to the Food and Drug Administration. The agency has a goal of making a decision about whether to approve duvelisib by Oct. 5, 2018. It isn't bound to that date, but the oncology division has typically tried to complete approvals early given the unmet need.

While the recent dilution has resulted in shareholders having a smaller slice of the pie, hopefully, if duvelisib is approved, the overall size of the pie will ultimately be larger.

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