What happened

After it announced a secondary common stock offering, shares of Catalyst Pharmaceuticals (NASDAQ:CPRX), a commercial-stage biopharma focused on rare diseases, fell as much as 16% in early-morning trading on Thursday. The stock was down about 11% as of 10:38 a.m. EST.

So what

Here are the details of the capital raise that we know so far:

  • Catalyst wants to sell 8 million shares of stock. The company had 105.9 million diluted shares outstanding as of June 30th, which suggests the dilution rate will be about 8%.
  • The underwriters of the deal are being granted a 30-day option to purchase up to an additional 15% of the shares of common stock on the same terms and conditions.
  • The net proceeds from the offering will be used to commercialize the drug Firdapse in both the U.S. and Japan. They may also be used for "the acquisition or in-license of additional product candidates or businesses."

Given the current share price of about $6.60, this offering could raise about $61 million in proceeds before fees are subtracted.

Ben Franklin on hundred dollar bill surrounded by pills

Image source: Getty Images.

Traders were taken aback by the surprise capital raise and are knocking down the share price in response. That reaction makes sense given that the company recently became profitable and currently holds more than $64 million in cash in its bank account.

Now what

Catalyst is in the process of commercializing its one and only product, Firdapse, as a treatment for the rare disease Lambert-Eaton myasthenic syndrome (LEMS). However, the company is also engaged in a legal battle over a rival therapy, which isn't something that usually happens to pharmaceutical companies focused on rare diseases.

Traders might be interpreting this surprise capital raise as a sign that management isn't confident Catalyst can win the battle. It's also possible that management might be getting ready to make an offer to acquire the rival drug.

Either way, this news is a surprise development, so it is easy to understand why shares are taking a step back today.