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Why Compugen Ltd. Shares Got Hammered

By Sean Williams - Feb 28, 2014 at 1:43PM

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Compugen shares tank after announcing a secondary share offering. Is this the opportunity investors have been waiting for or a reason to keep your distance?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Compugen (CGEN 1.37%), a biopharmaceutical company engaged in the research and development of therapeutic and diagnostic biomarkers, tumbled as much as 21% after announcing a secondary share offering after the closing bell last night.

So what: According to Compugen's fresher press release from this morning, the company anticipates pricing 6 million shares at $10.50 per share in an effort to raise $63 million in gross proceeds. The $10.50 price represents a 26% discount from yesterday's close and would at least imply on the surface that there was little interest from buyers following Compugen's most recent rally. Compugen anticipates the share offering to close on or about March 5, 2014. Overall, this will boost its outstanding share count by 14.5% and should boost its cash on hand to more than $100 million.

Now what: One of the biggest downside dangers that biotech investors face is dilution. If small to mid-sized biotechs don't partner up with a larger firm, they'll need to raise money somehow, and turning to share offerings tends to be quite common, especially following a significant run higher in a stocks' share price. For Compugen, the 26% discount to its share offering from yesterday relative to the 14.5% increase in its outstanding shares is worrisome and demonstrates little buying interest. I would use this offering as a cue to keep your distance and let Compugen's pipeline do the talking to woo you back.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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