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Here's the Surprising Reason ArQule Shares Rose as Much as 11% Today

By Maxx Chatsko – Updated Jun 25, 2019 at 3:17PM

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Investors are increasingly optimistic about the company.

What happened

Shares of ArQule (ARQL) gained 11% today after the company announced a public stock offering. It will issue up to 10.6 million shares -- increasing the outstanding share count by about 10% -- and raise up to $103.5 million in gross proceeds. It exited March with $92 million in cash on hand.

That's right: Management is going to dilute existing shareholders to raise growth capital from the public markets, and investors couldn't be happier. While the direction of today's stock movement is a bit unusual, investors who have been following the company's recent progress can see the logic. 

As of 2:04 p.m. EDT on Tuesday, the stock had settled to a 6.4% gain.

A businessman tossing cash into the air.

Image source: Getty Images.

So what

ArQule has reported multiple early stage successes from its revamped pipeline in recent weeks. That includes promising results from ARQ 531 in difficult-to-treat cancers affecting white blood cells, and from ARQ 092 in rare overgrowth diseases. Those updates sent shares soaring 39% from the end of May excluding today's gains.

While dilution is never ideal, pulling the trigger on a public offering at a significantly higher stock price can soften the blow since fewer shares need to be issued to raise the same amount of capital. That's exactly what management is doing here -- and investors aren't arguing. Shares have now gained 50% since the end of May.

Now what

Assuming the maximum amount of shares offered find a home and the business spends roughly $10 million in cash in the current quarter (in line with recent levels of cash burn), then ArQule will exit June with approximately $180 million in cash. That should de-risk the financial component of initiating midstage trials for its maturing pipeline, although successful outcomes will ultimately decide the company's fate.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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