Biotech Stock Mailbag: Onyx, Savient

BOSTON, Mass. (TheStreet) -- This week's Biotech Stock Mailbag kicks off with two questions from David B. I'll take them one at a time.

"Why is Onyx Pharmaceuticals(ONXX Quote) doing a secondary stock offering? They have nearly $500 million in cash and almost no debt. They have recurring revenue... from Bayer, which is more than sufficient to cover their costs. And that revenue is growing quarter over quarter. Why sell four million shares to raise $140 million? What's the point?"

Some of Onyx's institutional shareholders are ticked off at management for raising money now. That's why the stock fell 15% Wednesday to $31.18, the day after Onyx announced the equity offering of 4 million shares plus another $200 million in convertible debt.

The financing news just killed the stock. Killed it. Second-quarter earnings, also announced Tuesday night, came in better than expected. The company guided to the low end of its previously stated 2009 Nexavar sales forecast, but most everyone on the Street was there already, so I don't count that as a major blemish. Onyx is profitable, and like David pointed out, has almost $500 million in the bank already.

Plus, don't forget the news from two weeks ago about the positive results from a phase II study of Nexavar in breast cancer patients.

So with all that and some nice momentum in the stock, Onyx management throws a giant buzzkill into the party. Huh?

The worry on the Street is that Onyx management will use the money to buy something expensive and stupid -- some late-stage drug or an entire company that will never earn a meaningful return. To protect their own interests, some shareholders want the company to put any large purchase, if one is proposed, to a shareholder vote.