What happened

Shares of Passage Bio (NASDAQ:PASG) were down by 13.7% at 2:20 p.m. EST after the biotech disclosed pricing of its secondary offering of 7 million shares at $22 per share. The gene therapy company will gross $154 million from the stock sale, although the capital raise could increase if the underwriters use their 30-day option to acquire an additional 1.05 million shares.

So what

Passage's share price closed at $22.82 Thursday, so a reset in valuation seems reasonable since investors in the secondary offering were only willing to pay $22 per share. That the price slipped substantially below that has to do with investors getting diluted through the sale of new shares.

Regardless of its near-term impact on the share price, raising money now was likely still a good idea. Passage ended the third quarter with $335.7 million in the bank, but it has plans to initiate three clinical trial programs in the first half of this year. Building up a nest egg ahead of that is a smart move, especially with shares trading more than 20% higher than the company's IPO price of $18.

Calculator and pencil on a financial statement

Image source: Getty Images.

Now what

While the dilution wrought by secondary stock offerings is never a pleasant prospect for shareholders, they are a necessary evil for most clinical-stage biotech companies. If they don't bring in enough via their IPOs to get them through the marathon process of drug development, they have few other options for raising the capital required.

Rather than focus on the daily price movements, investors would be better off keeping track of the progress Passage Bio is making with its gene-therapy programs for rare diseases, including GM1 gangliosidosis, Krabbe disease, and frontotemporal dementia caused by a granulin mutation. The U.S. Food and Drug Administration and U.K. Medicines and Healthcare products Regulatory Agency have both cleared Passage Bio to start a clinical trial for PBGM01 for infantile GM1 gangliosidosis. Clearances for the other two trials should come shortly.

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