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Here's the Surprising Reason ArQule Shares Rose as Much as 11% Today

Maxx Chatsko, The Motley Fool

What happened

Shares of ArQule (NASDAQ: ARQL) gained 11% today after the company announced a public stock offering. It will issue up to 10.6 million shares -- increasing the outstanding share count by about 10% -- and raise up to $103.5 million in gross proceeds. It exited March with $92 million in cash on hand.

That's right: Management is going to dilute existing shareholders to raise growth capital from the public markets, and investors couldn't be happier. While the direction of today's stock movement is a bit unusual, investors who have been following the company's recent progress can see the logic. 

As of 2:04 p.m. EDT on Tuesday, the stock had settled to a 6.4% gain.

A businessman tossing cash into the air.

Image source: Getty Images.

So what

ArQule has reported multiple early stage successes from its revamped pipeline in recent weeks. That includes promising results from ARQ 531 in difficult-to-treat cancers affecting white blood cells, and from ARQ 092 in rare overgrowth diseases. Those updates sent shares soaring 39% from the end of May excluding today's gains.

While dilution is never ideal, pulling the trigger on a public offering at a significantly higher stock price can soften the blow since fewer shares need to be issued to raise the same amount of capital. That's exactly what management is doing here -- and investors aren't arguing. Shares have now gained 50% since the end of May.

Now what

Assuming the maximum amount of shares offered find a home and the business spends roughly $10 million in cash in the current quarter (in line with recent levels of cash burn), then ArQule will exit June with approximately $180 million in cash. That should de-risk the financial component of initiating midstage trials for its maturing pipeline, although successful outcomes will ultimately decide the company's fate.

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Maxx Chatsko 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.