Viking Therapeutics raised $575 million in a supplementary public offering after positive trial results.
Share dilution reduces EPS by about 7.2%, and the earnings yield per dollar invested is now 14.4% lower.
Viking Therapeutics (NASDAQ: VKTX) stock soared after the release of excellent top-line results from a maintenance study of its weight-loss drug VK2735, and the company promptly moved to ultimately raise $575 million via a supplementary public offering of common stock ($316.2 million worth at $35) and $258.8 million in convertible senior notes. However, the stock now trades below the $35 price of this latest common equity offering. Is it worth buying?
On balance, the answer is: If you were bullish on the stock before the top-line results came out, it makes sense to buy it now, too.
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Let's run some simple numbers. At the time of writing, Viking's stock is up only 8.4% from the day before the results announcement. However, the share count before the stock offering was 116.6 million, and the company closed on another 9 million shares. The increase in share count dilutes existing shareholders, and you can pencil in a rough reduction in earnings per share of about 7.2%, or 0.928 of its previous level.
However, the share price rose 8.44%, so earnings per share per dollar invested at the current share price have also changed. You can calculate this by dividing 0.928 by 1.084 (the increased share price), which gives 0.856, a 14.4% reduction.
In plain English, assuming the same earnings, the earnings yield per dollar invested at today's price will be 14.4% lower.
While the top-line results were excellent, they didn't include the oral pill (which will come in the second part of the trial), but they were good enough to somewhat de-risk maintenance dosing with injectable VK2735. That's a major plus in itself and justifies the de facto 14.4% loss in earnings power per dollar (assuming unchanged earnings) for investors, both before and after the results release and the subsequent common stock offering.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Viking Therapeutics. The Motley Fool has a disclosure policy.