After the biotech's shares fell almost 20% Tuesday following its announcement that it would be raising capital two different ways, Ardelyx (NASDAQ:ARDX) stock was trading 14.3% lower early Wednesday afternoon after it revealed the pricing for its secondary stock offering.
Ardelyx will sell 12.5 million shares at $4 per share to raise $50 million in the secondary offering. That's a substantial discount to the $4.55 it closed at Tuesday, and a whopping 29% off the closing price before the company announced it was selling additional shares.
With the buyers of the secondary offering only willing to pay $4 per share, it's no surprise to see shares trading at just under that level Wednesday.
The problem with secondary offerings is that they can dilute shareholders substantially, especially as the price goes down, which pushes up the number of shares that need to be sold in order to raise a set amount of capital.
The underwriters of this offering will also have the option to purchase 1.875 million additional shares. Given that 47.6 million shares were outstanding at the end of the first quarter, this will dilute current shareholders stakes by 23%, assuming the underwriters take that option.
To illustrate what that means, if Ardelyx successfully launches its lead drug candidate, tenapanor, and investors think it's eventually worth a market cap of $476 million, with the current number of shares outstanding, each share would have been worth $10. Now that there will be 61.975 million shares -- again, assuming the underwriters' option is taken -- each share in that scenario would only be worth $7.68. Investors can still making money from here -- and even from where shares were before the secondary offering was announced -- but not as much as they could have made if Ardelyx hadn't needed to raise additional capital.
There's an old adage in biotech that companies should raise money when they can, not when they need to. Ardelyx doesn't seem to have followed that advice very well, considering that its shares were well over $12 in early 2017. Raising the same amount of capital at $12 per share would have resulted in a dilution of shareholders one-third the magnitude of the one they'll endure now.