Keryx Biopharmaceuticals (NASDAQ:KERX) is defying gravity. The company announced a share offering of $55 million after the market closed on Tuesday, yet shares are still up more than 12% in early trading today. That's the biotech equivalent of defying gravity.
The law of biotech gravity
Here's how it normally works. An up-and-coming biopharmaceutical company needs cash to continue development or ramp up for commercialization of a promising drug. Said company then announces a secondary public offering of shares to raise that much-needed cash. Shares subsequently fall, if only temporarily, because of dilution.
This scenario played out several times in recent months. For example, MannKind (NASDAQ:56400P706) closed at $2.60 per share on Oct. 17. The company announced a public offering after the market closed. Shares plunged 24% in the aftermath, but regained lost ground over the next few months.
All we need to do is change the company name and the numbers for the same story to be told for Lexicon Pharmaceuticals (NASDAQ:LXRX). On the same day that MannKind announced its secondary offering, Lexicon made a similar announcement. Shares promptly fell the next day by nearly 10%. The stock eventually fell much more before climbing most of the way back.
The math of share dilution works in nearly every case against the price of the stock. More shares outstanding means that each share is worth less, therefore pushing share prices down. It happened with MannKind, Lexicon, and plenty of other stocks. But not with Keryx.
The secret to flying
The late author Douglas Adams wrote that the secret to flying, thus defying gravity, was "learning how to throw yourself at the ground and miss." Adams went on to add that "clearly, it is the second part, the missing, which presents the difficulties."
Keryx knows how to miss the ground. If the company had announced a secondary offering back in October at the same time as Lexicon and MannKind, its shares would probably have fallen by a significant amount. Keryx's management knew that the optimum timing for raising more cash would be after the announcement of the phase 3 results for Zerenex. Even then, shares could have still fallen.
Overwhelmingly positive results for Zerenex, though, allowed Keryx shares to fly despite share dilution. The real secret to defying gravity is to amass enough speed to overcome its effects. That's really how Keryx managed to do it.
Keryx seems likely to continue its gravity-defying ways for a while. Oppenheimer just raised its target price for the stock to $11 per share, reflecting a 17% upside potential over the current price. Some have even higher estimates. Of course, the higher the stock goes, the more difficult continued growth will be.
Don't expect most companies to achieve what Keryx has done. As Douglas Adams said, "Most people fail to miss the ground, and if they are really trying properly, the likelihood is that they will fail to miss it fairly hard."
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.