If you wondered why share prices fall after a capital raising, Botanix is the ‘perfect’ poster child

We thought this was a perfect time to ponder the question,’ Why share prices fall after a capital raising’, in light of what happened with Botanix Pharmaceuticals (ASX:BOT). Its shares fell 33% in less than an hour of trading. Now, shouldn’t investors be happy that the company has $45m more cash? Let’s just say that Botanix would not have needed that $45m if things were all going well.

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Here’s why share prices fall after a capital raising

Share prices often fall after a capital raising because, while the company does receive more cash, that cash usually comes with trade-offs that matter a lot to existing shareholders.

The most immediate issue is dilution. When a company issues new shares, the total number of shares outstanding increases. Unless the new capital generates returns above the company’s cost of capital fairly quickly, each existing shareholder now owns a smaller percentage of the business and a smaller claim on future earnings per share.

Even if total profit eventually rises, earnings per share can fall in the near term simply because there are more shares in circulation. Markets tend to price shares based on per-share metrics, not just total profits, so dilution alone can pressure the price.

Another major factor is pricing. Capital raisings are often done at a discount to the prevailing market price in order to attract buyers quickly and reduce execution risk. That discounted issue price effectively becomes a new reference point for valuation.

If new investors are buying at, say, a 10–20 percent discount, it can be hard for the market to justify keeping the old, higher price immediately afterward. The market price frequently drifts toward the issue price.

There is also the signalling effect. In theory, raising capital to fund attractive growth projects should be positive. In practice, investors ask why the company needs external funding at all. If management believed the shares were undervalued, issuing new equity might seem counterintuitive because it sells part of the business cheaply.

Equity issuance can therefore be interpreted as a signal that management thinks the current valuation (or perhaps the valuation before the raise especially if the raise was done at a discount) was fair or even generous. In weaker companies, a capital raising may raise concerns about liquidity problems, covenant pressure, unexpected losses, or cash burn. Even when those fears are overstated, the perception can weigh on the stock.

Purpose matters

The purpose of the raise matters enormously. If the funds are clearly earmarked for a high-return acquisition, expansion into a fast-growing market, or strengthening the balance sheet after a temporary shock, investors may ultimately view it positively. If a new major investor is buying in, especially if it is at a premium, then investors will get excited.

But if the company is raising money simply to plug operating losses, refinance looming debt without improving fundamentals, or “buy time,” the market may interpret it as a sign of structural weakness rather than opportunity.

There are also mechanical effects. Large institutional investors who receive new shares in a placement may sell some holdings to rebalance portfolios. Arbitrage traders sometimes short the stock once a discounted raise is announced, expecting the price to move toward the issue level. That selling pressure can push the share price down in the short term, regardless of long-term fundamentals.

So while it might seem intuitive that “more cash and more investors” should be good news, equity capital is not free. It changes ownership structure, affects per-share economics, and can signal management’s view of valuation or financial stress. Whether a capital raising ultimately creates value depends less on the act of raising money and more on what the company does with it and whether the return on that new capital exceeds the cost of issuing it.

Botanix Pharmaceuticals is the poster child

Remember how Botanix Pharmaceuticals raised $40m less than 12 months ago, in April 2025, at $0.33 per share? The company declared that,’ These funds will allow us to accelerate the commercialisation of Sofdra, which is particularly exciting given the sales performance of Sofdra in only the first 9 weeks of launch’.

Indeed the data for Sofdra (a treatment of excessive underarm sweating) was exciting with new patients trending to 500 per week and 100% of eligible patients got a refill after their ‘first fill’ with some up to their 5th.

But it all went sour after that – case in point, it is raising $45m at $0.06 per share. Why? Growth slowed, the company burnt cash to try and speed things up but the opposite happened. Clearly this raise is not about growth funding, it is filling the gap.

One of the key reasons mentioned was bringing in an alternative API (active pharmaceutical ingredient) supplier. Of course, a single supplier setup means limited bargaining power on pricing and is exposed to capacity or logistics issued.

The fact that Botanix Pharmaceuticals had to prioritise finding an additional supplier — not because manufacturing had completely failed, but because costs were materially higher than anticipated and the supply base was not as resilient as hoped — is the kind of execution detail that markets tend to punish. Even though the strategy to engage a secondary supplier is prudent and potentially value-creating if it succeeds, the initial need for it underscored that the company’s cost assumptions and supply planning were not fully aligned with reality once they began scaling sales.

By talking about bringing in a secondary supplier only after these issues emerged, Botanix Pharmaceuticals effectively admitted that its initial manufacturing setup was not optimal. Markets often react to that kind of “back to the drawing board” with scepticism, especially when it comes soon after a previous capital raising and during a period when the share price was already under pressure.

Discount and timing hurt

The large discount is critical. When a company raises equity at a steep discount to the prevailing market price, it effectively resets expectations. New investors are coming in at a much lower price, and that becomes an anchor for valuation. Existing shareholders see immediate dilution and, in many cases, an unrealised loss relative to where the stock had been trading. The deeper the discount, the more it signals urgency. Investors often interpret that as bargaining power lying with the buyers, not the company.

Timing compounds the issue. If “the rot” appeared only weeks after the April 2025 raise — meaning operational or rollout problems became evident shortly after management had assured the market it was well funded — trust becomes a factor. Investors may feel they were not fully apprised of risks at the time of the earlier capital raising. Even if that perception is unfair, credibility damage can weigh more heavily than the financial dilution itself. Markets tend to punish uncertainty and perceived governance risk swiftly.

There is also a structural dynamic in small-cap biotech. Commercialisation is capital intensive and rarely smooth. If uptake disappoints or distribution challenges emerge, cash burn can remain high while revenue lags projections. When that happens soon after a prior raise, investors begin to question forecasting accuracy and cash runway assumptions. The issue becomes not just dilution, but whether the business model is de-risking as promised.

In theory, raising capital to fix rollout bottlenecks or extend runway can be sensible. More capital should reduce insolvency risk and give management time to execute. But when it follows closely on a prior raise and is priced at a significant discount, the market often reads it as defensive rather than strategic. The share price falls not because cash is bad, but because the circumstances imply weaker execution, higher risk, and lower confidence in forward projections.

Conclusion

Botanix Pharmaceuticals therefore illustrates the broader principle: equity raisings are judged less on the fact of raising money and more on the context — the gap between previous assurances and current needs, the size of the discount, and whether the capital is funding growth or patching emerging problems.