Today, shares of Universe Pharmaceuticals (NASDAQ:UPC) are on the move. Indeed, at the time of writing, investors in UPC stock have seen 35% gains in early trading.
The Chinese pharmaceutical company has seen quite the volatility since its initial public offering in March. The company offered 5 million shares at $5 each, raising $25 million in the offering. Universe expects to use these funds to build out its manufacturing facilities, R&D capabilities, and its branding, advertising, and marketing efforts.
However, today, the company’s share price is on the move, breaching the $5 level after falling as low as $3.75 in recent days.
Why the bump?
Well, today, Univest Securities announced it was exercising its over-allotment option.
Let’s dive into what exactly an over-allotment option is, and why this stock is surging today.
Why UPC Stock Is Surging on Over-Allotment News
During most initial public offerings (IPOs), the brokers (usually investment banks) doing the “dirty work” behind the scenes to bring a company public, are given an allotment by the company to sell.
In the case of Universe, we see that the company raised $25 million in its IPO. Accordingly, 5 million shares at $5 apiece were offered in this allotment. That makes sense.
However, initial press releases pegged the amount the company wanted to raise at approximately $30 million. Here’s where the over-allotment option comes into play.
Universe exercised its over-allotment option to buy another 750,000 shares at $5 apiece. That gave the company another $3.75 million, and got them pretty darn close to its $30 million goal.
When a company like Universe has a range — let’s say $25 million to $30 million it wants to raise, it’s typical to see the initial public offering come in at the lower bound of the range. An over-allotment option can thus take the company toward the higher end of its range, if the broker exercises the option.
Here’s the interesting piece with this deal. Yesterday, shares closed around the $4 level. That means it’s uneconomical for the broker to exercise the over-allotment option, unless the broker believes the shares are worth substantially more than $5 each.
The market has taken this news very positively. Indeed, any exercise of an over-allotment option is a strong signal to the market. However, an over-allotment option is just like an options contract individual investors can buy. When such an option is exercised that far out of the money, the individual exercising needs to be pretty darn sure they’re going to make up the difference in the near term.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.