Why Exelixis Shares Tumbled

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 drugmaker Exelixis (NAS: EXEL) dove 13% after it announced plans to raise new capital through debt and stock offerings.

So what: Shareholders never like to see their stock diluted, so the negative reaction shouldn't be surprising. The development-stage biotech hopes to sell 20-million new shares, and raise $225 million in convertible debt, because it's still unprofitable and needs to fund future research. At a market cap of just $720 million, the offering dilutes share value by more than 10%, so the drop in share price looks warranted. Over the last week, shares have fallen about 25%, as the company reported a sharp decline in quarterly earnings due to transferring development activities on certain drugs to Sanofi.

Now what:As a young biotech, this stock is essentially binary, with its outcome riding on the results of its cabozantinib drug, now entering Phase 3 testing. The drug is used to reduce tumor growth in cancers of the liver, kidney, and ovaries. Considering the potential returns if the drug is successful, today's movement is essentially noise. Investors should keep up an eye on cabozantinib's Phase 3 trials for a better idea of where the stock is going. Initial Phase 3 trials have shown positive results.

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The article Why Exelixis Shares Tumbled originally appeared on Fool.com.

Fool contributorJeremy Bowmanholds no positions in the companies in this article. The Motley Fool owns shares of Exelixis. Motley Fool newsletter services have recommended buying shares of Exelixis. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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