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Why Medgenics Inc.'s Shares Are Down Big Today

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What: Shares of Medgenics (NYSEMKT: MDGN) , a clinical-stage biotech focused primarily on gene therapy, are down by more than 13% as of 11:30 a.m. EDT on the news that the company is raising capital through a common stock offering.

So what: Medgenics is expected to raise about $20 million by selling 3,640,000 shares of its common stock to the public for a price of $5.50 per share. Underwriters of the deal also retain the option to purchase an additional 546,000 shares, which could push the total proceeds from the deal up to $23 million. If that happens, this offering could dilute current shareholders by nearly 13%.

The $5.50 share price represents a sharp discount to yesterday's closing price of $6.24, which is probably the main reason why shares are getting slammed today. The deal is expected to close later this week.

Now what: Last quarter Medgenics produced a net loss of more than $11 million, and its cash balance fell to only $43.8 million. If this elevated level of spending persists, this company could find itself out of capital in less than a year, so investors shouldn't be all that surprised to see a capital raise. That's especially true when you consider that Medgenics recently kicked off enrollment in its phase 2/3 clinical trial testing the ability of its compound NFC-1 to treat mGluR-mutation-positive attention deficithyperactivity disorder (ADHD), which will likely cause spending levels to continue to climb throughout the remainder of the year.

Medgenics could also be responsible for making a multimillion-dollar payment to its Japanese partner Kyowa Hakko Kirin in 2017, if the company exercises its option to license Kyowa's anti-LIGHT monoclonal antibody. A phase 2 study is currently underway testing the anti-LIGHT antibody's ability to treat severe pediatric-onset inflammatory bowel disease. If all goes well, Medgenics believes this could be a $300-million-plus opportunity, so exercising the option down the road could make a great deal of financial sense.

Medgenics' technology and opportunity look quite promising, but there are still a huge number of hurdles to overcome before this company starts to generate meaningful revenue from its pipeline. I'd advise potential investors to approach this company's stock with a great deal of caution.

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Brian Feroldihas no position in any stocks mentioned. Like this article? Follow him on Twitter where he goes by the handle@Longtermmindset or connect with him onLinkedInto see more articles like this.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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