What happened

Shares of Innovate Biopharmaceuticals, Inc. (NASDAQ:INNT) plunged 66% on Monday in a move apparently spurred by a filing related to a proposed stock offering. Innovate filed a securities registration statement amendment with the U.S. Securities and Exchange Commission (SEC) last week detailing the company's plans to issue up to $175 million of new stock and to sell nearly 14 million shares of existing stock. The biotech's filing was accepted by the SEC after the market closed on Friday, July 13, 2018. 

So what

The potential for Innovate to sell as much as $175 million of new shares is a big deal for a company that had a market cap of around $600 million prior to Monday's close. However, Innovate's stock offering made sense.

Businessman looking at falling chart

Image source: Getty Images.

Innovate Biopharmaceuticals ranked as the No. 1 best-performing biotech stock in the first half of 2018, with its share price skyrocketing 3,260%. The company doesn't have a lot of money, though, reporting cash and cash equivalents totaling a little under $13 million as of March 31, 2018. Innovate lost over $16 million in the first quarter. 

The biotech certainly needed to raise additional cash. With its stock price up so much so quickly, a secondary offering was a straightforward way to get that cash. The downside of the move, though, is that it will dilute the value of existing shares.

Now what

More volatility could be likely for Innovate Biopharmaceuticals. The biotech doesn't have a product on the market yet, so it's still in cash-burning mode. The recently announced stock offering should help the company fund operations for a while, though.

Innovate is preparing to begin a phase 3 clinical study evaluating lead candidate larazotide acetate (also known as INN-202) in treating celiac disease. Investors might want to monitor the larazotide's progress, as there are more than 3 million U.S. patients with celiac disease and no approved drugs for the indication at this point. Watching and waiting is probably the best course of action for investors, however.