What happened

Shares of Momenta Pharmaceuticals (MNTA) were down 14% at 3:20 p.m. EST on Wednesday following Tuesday's announcement that the biotech plans to raise $200 million, with the potential for $30 million more, by selling additional shares.

So what

It's fairly common for shares to drop after the announcement of a secondary offering. Current shareholders will be diluted when the additional shares are issued, resulting in each share representing a smaller fraction of the company. And secondary buyers typically want a discount to the trading price, so investors today are anticipating the likely change in valuation.

Momenta Pharmaceuticals ended the third quarter with a little over $325 million in the bank, which isn't a terribly long runway for a company that isn't profitable and is a few years away from getting its next drug on the market.

With shares at a 52-week high, now is the right time for Momenta to raise additional cash. By selling at a higher share price, the company can sell fewer shares to raise the same amount of cash, thus limiting the dilution of current shareholders.

Magnifying glass and pen on a balance sheet

Image source: Getty Images.

Now what

The share price that the institutional investors who buy the secondary offering are willing to pay will set Momenta's valuation in the short term. It's entirely possible it'll be lower than where the stock closes today.

Longer term, biotech stocks are valued on the success of their pipeline. For Momenta, that's mainly nipocalimab, which is being tested for three different autoimmune diseases. Results from the first mid-stage study in a disease called generalized myasthenia gravis are expected in the second or third quarter of next year, so investors won't have to wait too long for an early indication of Momenta's pipeline potential.