Don't Let Offerings Blindside Your Thesis

Where offerings are concerned, IPOs take the cake, given the hype surrounding the events. Their lesser brethren, secondary offerings, do not attract as significant attention, often passed off as routine corporate affairs.

What Are Secondary Offerings?

A company does a second offering through issuance of new shares or when major shareholder(s) sell all or part of their holdings. In the former case, the net proceeds after deducting the underwriting fees are due to the company, while in the latter case, the proceeds go to selling shareholders. The company then uses the proceeds to fund investment opportunities or refinance its debt.

How Do Firms Time Secondary Offerings?

When a company embarks on a follow-on offering, it cannot price the shares above the current market price for the obvious reason that traders may choose to buy shares in the open market rather than buying at a premium in a secondary offering.

The company may instead opt to price the secondary offering slightly below the market price. This takes us to the next question regarding the timing of the offering. Any prudent company may prefer to go for a secondary offering when the market price of the security is elevated, unless and otherwise there is a dire necessity to have funds irrespective of the market conditions.

Case In Point...

Aurinia Pharmaceuticals Inc AUPH, a clinical stage biopharmaceutical company focusing on immunology products, announced last Monday a secondary offering, although it confirmed the issue size and pricing at 22.30 million and $6.75 per share, respectively, on Tuesday.

The company, which saw its heyday in mid-2010 and has been flatlining since late 2013, began a strong rally in March. The rally was fueled by positive top-line results from a mid-stage trial evaluating its lupus medication voclosporin.

The stock gained 184 percent through March 13, the day it announced the offering. However, subsequently, it shed 25 percent on March 14.

AUPH Source: Y Charts

Instances Of Secondary Offerings Capitalizing On Rallies

A similar development happened with TG Therapeutics Inc TGTX. The company's shares nearly doubled on March 6. Since March 5, the stock has been up 145 percent. The gains followed the company releasing positive top-line data from its Phase 3 GENUINE study of its treatment candidate TG-1101 in combination with Ibrutinib in patients with high-risk chronic lymphocytic leukemia.

Taking advantage of the spike, the company announced a common stock offering on March 8.

DryShips Inc. DRYS announced a registered direct offering on November 17, 2016. The offering took advantage of a 1,500+ percentage rally seen for four days following the November 8 presidential elections. A host of factors, including a surge in the Baltic Dry Index and a reverse stock split, were instrumental in the mid-November rally of DryShips.

BioCryst Pharmaceuticals, Inc. BCRX announced a public offering on March 8, following a 62 percent spike seen since February. Subsequently, the stock has given back some of these gains. Positive interim analysis of its Phase 2 APeX-1 trial in hereditary angioedema announced on February 27 was the reason behind the run up.

Prothena Corporation PLC PRTA said on November 9 that results from the Phase 1b study of PRX002 demonstrated robust antibody CNS penetration and significant reduction of free serum alpha-synuclein in patients with Parkinson's disease. The stock spiked to a closing high of $67.64 on November 14 and has held above the pre-rally level since then despite a modest pullback. The company announced a common stock offering on March 2.

MeetMe Inc MEET also announced a public offering on March 9 and ahead of the announcement, the shares had seen a spike.

Take Caution, Investors

Investors would do well to take cognizance of this recent development of companies offering common stock immediately after their stocks see a pop following some positive catalysts.

The company in question may be readying to offer its shares in a common stock offering.

As the logic goes, secondary offerings are negative for stocks, given that:

• It increases the float, which in turn dilutes the number of outstanding shares. If the classical demand-supply equation of economics holds true, the increased supply would lead to a decline in stock price.
• When insiders sell shares in an offering, it is generally viewed as reflective of lack of confidence in the company's growth potential.

However, there are instances when stocks have gone up after a secondary offering, too. Therefore, investors have to make their investment decisions based on the merits of each case.

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