Novogen Limited sinks 30%: Here's why

Novogen Limited (ASX:NRT) sinks on huge capital raising and rights issue

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published April 21, 2015 1:31 pm AEST

Biotech stock Novogen Limited (ASX: NRT) has seen its shares fall more than 30% today after the company announced plans to issue 98.7 million new shares at 30 cents each.

In lunchtime trading, Novogen shares were changing hands at around 28 cents. That suggests that shareholders aren't happy to be in the company and are selling down no matter the price. Theoretically, shares should only have dropped as low as 30 cents – the price at which new shares are being issued.

Either that or investors see the strong chance of further dilution taking place thanks to the issue of options for another 147 million shares. Novogen is issuing 6-month options up to 98 million ordinary shares at 30 cents and 5-year options over a further 49 million ordinary shares at a price of 40 cents.

The biotech is raising $15.5 million in a private placement to institutional investors, with a further $15 million expected to be raised via a 1 for 6 non-renounceable rights issue to existing shareholders.

Novogen says it needs the funds to 'provide a runway for our 3 lead oncology candidate drugs', 'where we might expect to see objective evidence of clinical benefit.'

Despite today's fall, shares in Novogen are still 155% higher than at the start of this year, following a number of positive announcement surrounding its anti-cancer drugs – as colleague Ryan Newman pointed out last week.

But as I often note when writing about investing in small biotech stocks, the huge risks mean investors can and need to take some precautions against one or more biotech stocks in their portfolio from crashing.

And that happens on a regular basis. Check out the charts for Pharmaxis Ltd (ASX: PXS), Prana Biotechnology Limited (ASX: PBT), QRxPharma Ltd (ASX: QRX) and Acrux Limited (ASX: ACR) – which all look like rollercoasters and you can see what I mean.

Very few end up hugely successful like CSL Limited (ASX: CSL), Resmed Inc (ASX: RMD) and Cochlear Limited (ASX: COH).

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