What happened

Shares of Gossamer Bio (NASDAQ:GOSS) were tumbling 16.4% lower as of 11:55 a.m. EDT on Tuesday. The decline came after the company announced the pricing of a secondary stock offering of more than 9.4 million shares and $200 million in convertible senior notes due in 2027. Gossamer plans to offer the additional stock at a price of $13.25 per share.

So what

Secondary stock offerings are common occurrences for small biotechs like Gossamer. But they come with a major downside for the biotech stocks: the dilution in the value of existing shares.

Businessman looking at red line trending downward

Image source: Getty Images.

The pricing of Gossamer's secondary offering and convertible senior notes is nearly 12% below the stock's closing price on Monday. The addition of more than 9.4 million new shares represents around 14% of its current outstanding shares. However, Gossamer also will allow the underwriters of the secondary offering to purchase another 1.4 million or so shares under the same terms. These additional shares bump up the dilution of the biotech's outstanding shares to around 16%, which not-so-coincidently is roughly in line with today's decline in Gossamer's share price. 

Investors should also note the good news with Gossamer's secondary offering and issuance of convertible senior notes. The company expects to raise around $325 million in gross proceeds. Gossamer plans to use its additional cash to fund research and development, advance its development programs, and for working capital and general corporate purposes.

Now what

Gossamer's offerings are expected to close on Thursday of this week. The company should have another key piece of news on the way. Gossamer anticipates reporting top-line data in the second half of 2020 from its phase 2 clinical study evaluating GB001 in treating chronic rhinosinusitis.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.