What happened

Shares of Rockwell Medical (RMTI -0.51%) were tanking by 28.6% as of 11:20 a.m. EDT on Tuesday. The big drop came after the biopharmaceutical company announced the pricing of its stock offering at $3 per share -- nearly 32% lower than the stock's previous closing price.

So what

Share dilution is a pretty straightforward concept. When a company like Rockwell Medical issues new shares, it lowers the value of existing shares. It's kind of like taking a 12-inch pizza with eight slices and cutting it into more slices. The original people who claimed the eight slices end up with less pizza to eat.

Businessman looking at red line chart going down

Image source: Getty Images.

Rockwell Medical is issuing more than 5.8 million new shares. That's only about 10% of the company's outstanding shares. It makes sense that Rockwell stock would fall around 10% because of dilution, but there's more to the story here than just that.

There's another concept that's also straightforward -- the law of supply and demand. When supply increases while demand remains constant, the price of a product falls. If supply increases while demand decreases, the price falls even more. 

Rockwell is increasing the supply of its stock. The company had to price the stock offering at $3 per share to attract buyers. This shows that Rockwell (or, more likely, the managers behind its stock offering) didn't think there would be enough demand for the additional shares to price the stock offering at a higher level. That's the bad news behind Rockwell's big plunge today.

However, there's also some good news. Rockwell will raise about $17.5 million with the stock offering. It plans to use part of this money to commercialize its iron-replacement drugs dialysate Triferic and IV Triferic. Investing in the launches of these drugs should enable the company to make more money over the long run.

Now what

The negative impact of Rockwell Medical's stock offering should only be temporary. Now the focus will be on the company's progress on other fronts. One key thing to watch with Rockwell is how well the launch for dialysate Triferic goes. Rockwell began selling the product in early May.

Rockwell also hopes for good news in the not-too-distant future for IV Triferic. It recently submitted the drug, targeted for dialysis patients, for FDA approval. Rockwell CEO Stuart Paul stated in the company's Q1 conference call that the company believes that its "Triferic platform has the potential to transform the management of anemia in hemodialysis patients."