What happened

Shares of Avadel Pharmaceuticals (AVDL) are up 30% at 2:24 p.m. EST after the biotech sold 8,680,225 American depositary shares and 487,614 shares of Series A nonvoting convertible preferred shares for $7.09 each in a private placement, grossing the company $65 million. Shares of Avadel closed at $7.12 yesterday, so the investors didn't request much of a discount.

So what

Avadel is developing FT218, a controlled-release formula of sodium oxybate, as a treatment for narcolepsy. The drug is being tested in the phase 3 Rest-On clinical trial comparing FT218 to Xyrem, a sodium oxybate product from Jazz Pharmaceuticals (JAZZ -0.42%) that has to be dosed twice a night. As a controlled-release formula, FT218 only has to be taken once a night.

Avadel didn't really need the cash right now. The biotech ended the third quarter with $72.5 million in the bank, which Avadel estimated would "fund operations well into 2021." Nevertheless, smart companies raise capital when they can, not when they have to, and the added cash will give Avadel more firepower to launch FT218, assuming it's approved by the Food and Drug Administration.

Pen and magnifying glass on a balance sheet

Image source: Getty Images.

Now what

Results from the Rest-On clinical trial are expected in the second quarter of this year, so some of today's run-up is likely due to investors jumping in ahead of the data release. Biotech investment funds deciding to invest now are likely being viewed as an endorsement in Rest-On being successful.

At a market cap of less than $350 million, Avadel won't need much in the way of sales of FT218 to support that valuation, especially since Avadel expected to generate $55 million in revenue in 2019 from its sterile injectable hospital products and received FDA approval for a fourth product in December.