When a publicly traded company decides to raise money through a secondary offering, it should give you pause. Not all secondary offerings raise red flags in biotech and pharmaceutical stocks. Some companies need capital to operate like any other business. However, when a company goes back to the well time after time with secondary offerings, you may want to shy away from the stock.
Secondary offerings are the issuance of new shares of stock after a company has conducted its initial public offering (IPO). Companies generally conduct secondary offerings to raise capital. If a biotech or pharmaceutical company has a history of multiple secondary offerings, it may mean that its research and development for some treatments have failed. The company was burning cash for clinical trials, which may have been the reason for multiple secondary offerings. The extra shares dilute the stock, which can be detrimental to shareholder value.
If a company has some treatments currently being marketed because it could use earnings generated from those treatments to fund clinical trials. Therefore, if it’s conducting secondary offerings, that could be a red flag.
To see whether a company is issuing a secondary offering, analyze its SEC Form S-3 filing. Check out a snippet of InsmpireMD’s (NSPR) SEC Form S-3 filing.
Secondary offerings could indicate the company is diluting the stock. That’s always dangerous to an investor. If you examine the company’s SEC filings and notice multiple secondary offerings, consider whether they change your opinion on the stock. It’s possible that you might want to wait until after any offering has passed before you consider playing it.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.