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Novogen Limited sinks 30%: Here’s why

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).

As the ASX heads towards 6,000, some experts are predicting a market crash…

Is a share-market crash coming? Get our analysts' exclusive inside take now, in The Motley Fool's newly updated report, "What to Do When the Sharemarket Crashes" -- including expert tips on how to protect YOUR portfolio. Click here for your FREE copy now.

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We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Motley Fool writer/analyst Mike King owns shares in CSL, Cochlear and Resmed. You can follow Mike on Twitter @TMFKinga

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