What happened

Shares of commercial-stage biotech company Insmed (INSM -2.11%) dropped by 14.7% on Wednesday. The stock closed on Tuesday at $22.01, but opened sharply lower on Wednesday at $21.08. It fell as low as $18.42 during the session before closing at $18.78. The stock is still closer to its 52-week low of $16.41 than its 52-week high of $34.44, and is down more than 31% this year.

So what

Insmed, which specializes in treatments for rare diseases, announced on Wednesday morning that it was undergoing a $775 million financing round to raise funds for key clinical trials and the potential launches of Arikayce (a treatment for the infection that can cause nontuberculous mycobacterial (NTM) lung disease) and brensocatib (a treatment for bronchiectasis, a condition where damage causes the tubes in the lungs to widen or develop pouches).

The funding round will include a $275 million sale of stock. The dilutive nature of that action will reduce the value of those shares already outstanding, which explains why investors bid them down Wednesday.

The news wasn't all bad, though. In a filing with the Securities and Exchange Commission, Insmed said it expects its third-quarter revenue to be roughly $67.7 million, up 44.6%, year over year, and said it ended the period with cash and cash equivalents of about $513.3 million on the books. If that preliminary revenue number bears out, it would top the $65.2 million in revenues Insmed brought in during Q2 (all from Arikayce sales), making Q3 the company's strongest quarter since it went public in May 2021.

Arikayce is the company's lead drug, and is the only medication approved by the Food and Drug Administration to treat mycobacterium avium complex lung disease. The company hopes to launch brensocatib as its second marketed drug as early as next year; it's currently in a phase 3 clinical trial that is expected to conclude in the first quarter of 2023. In Q2, Insmed booked a net loss of $95.6 million, or $0.80 per share.

Now what

Wednesday's stock drop seems to have been a bit of an overreaction, as the company's expenses can naturally be expected to increase as it seeks to broaden the label for Arikayce and to get regulatory approval for brensocatib. Like any biotech company that only has one marketed therapy, it is a risky investment, but if it can get another drug approved, that would open things up quite a bit. However, with only $513.3 million in cash and cash equivalents on the books, it really only had enough money to fund operations into 2024 at its current cash burn rate. This funding round may be dilutive, but it will give Insmed more time to reach profitability.