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Why Chi-Med Stock Is Tanking Today

Keith Speights, The Motley Fool

What happened

Shares of Hutchison China Meditech Limited (NASDAQ: HCM), better known as Chi-Med, were down 23.9% as of 11:11 a.m. EDT on Friday. The big drop came after the Hong Kong-based alternative biopharmaceutical company announced the upsizing and pricing of a secondary public stock offering earlier in the day. 

Hutchison Healthcare Holdings Limited (HHHL), a subsidiary of CK Hutchison Holdings Limited, is currently the largest shareholder of Chi-Med. HHHL plans to sell 12 million American depositary shares at a price of $24 per share.

Man dressed in a suit looking at red line going through floor

Image source: Getty Images.

So what

The most important reason why Chi-Med stock is falling today is the price tag of its secondary stock offering. Chi-Med closed at more than $30 per share on Thursday. A stock offering at $24 per share is a sure-fire way to drag the share price down quickly.

It makes sense, though, that Chi-Med would have to set the secondary offering price significantly lower than the previous trading levels. Another 12 million shares are about to flood the market. Anytime that volume of shares becomes available in a short period of time, share prices will naturally come down. It's the laws of supply and demand at work.

In most secondary stock offerings, the company receives a financial benefit. The stock offering is typically made to raise more cash to fund operations or expansion. That's not the case here, though. HHHL will pocket all of the proceeds from the offering, while Chi-Med won't get a dime.

On the other hand, most secondary stock offerings involve issuing new shares. This results in the dilution in the value of existing shares. However, since HHHL is selling shares that already have been issued, dilution won't be a factor for Chi-Med.

Now what

After the dust settles from this stock offering, investors can focus on what really matters for Chi-Med: Its core business in developing drugs. And there's at least one positive that could be on the way on this front.

Chi-Med recently announced that its experimental drug surufatinib met the primary endpoint of progression-free survival in a late-stage clinical study targeting the treatment of advanced non-pancreatic neuroendocrine tumors. The company plans to meet soon with Chinese regulators about submitting the drug for approval. 

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.