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BG Medicine : BGMD) Stock Plunges as Market Corrects for Pricing of Public Offering

04/03/2014 | 06:02pm US/Eastern

Shares in small-cap health care company BG Medicine (BGMD) plunged Thursday after the company priced the 6.45 million shares it plans to sell in a public offering.

The announcement, which came prior to the opening bell, led to the stock gapping down over 14 percent to $1.65 once markets opened. Shares continued to decline during morning trading, eventually settling at about $1.60 apiece.

It's hard to view the big decline as a vote of no-confidence in BG Medicine from the markets. Shares are still trading hands at a value above the newly priced stock offering. What's more, the public offering represents a significant increase in the size of BG Medicine's float. Currently sitting at just under 28 million, the float would increase 23.1 percent to 34.372 million shares, and that's not factoring in the 967,800 additional shares being held back for over-allotments.

This injection of liquidity becomes all the more important when one considers the high rate of insider ownership, which may have already resulted in pent-up demand driving big price swings. Insider ownership exceeds 40 percent of the float and has increased by more than 25 percent over the last half-year. As a result, one can roughly calculate that the free float for BG Medicine is set to increase by anywhere from 38.9 percent to 44.8 percent, resulting in a major injection of liquidity into the stock.

With this sort of boost in the total number of shares, combined with the pricing at $1.55 for the new shares, the day's losses would appear to represent markets simply resetting their valuation for the new shares rather than showing any real concern about BG Medicine's future.

BG Medicine has shown growing revenues, year-over-year, since 2010, and recently got a new vote of confidence in its BGM Galectin-3® Test from the Centers for Medicare and Medicaid Services (CMS) raised the national limitation amount (NLA) for the test, which has demonstrated the potential to substantially reduce the readmission rate of patients suffering from heart failure in studies.

BG Medicine already made big gains this year on a strong earnings report, and its potential for future earnings appears to be relatively strong. The sale of $10 million in new stock is expected to net $8.9 million for BG Medicine, potentially more if the over-allotments are all ultimately distributed, which the company plans to spend on commercializing its cardiac diagnostics tests, building the clinical case for its tests, and developing its product pipeline.

The public offering is expected to close by April 8, with underwriter Lazard Capital Markets LLC offering the over-allotment shares for an additional 30 days afterwards.

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