POZEN (Nasdaq: POZN ) took a 40% hit yesterday due to a Food and Drug Administration non-approval letter for its migraine headache drug, MT-100. In doing research on this company, it's clear that POZEN is very focused on migraine treatments. MT-100 was the furthest along the road of development, and the news is a devastating setback. I have written other articles about investing in biotech. One-trick ponies like POZEN are very risky, and yesterday's trading in its stock illustrates the point.
A quick look at the numbers reveals what a lottery ticket this stock is. The stock is estimated to lose $0.03 this year and $0.05 next year, but it would not be a shock to see those estimates revised lower after yesterday's news. POZEN trades at 50 times its sales even after the drop in price, and 8.4 times its book value. The only redeeming thing I can find is that it has $1.97 per share in cash. This allows the company the time to work on other areas of interest, which POZEN's website says are gastrointestinal, respiratory, oncology, and infectious disease. I was not able to find any information on actual drugs in these areas.
Yesterday was an unfortunate day for POZEN's shareholders. However, the market has given investors warnings about this stock. On Oct. 20, 2003, POZEN got similar FDA news about MT-300, another migraine drug. The stock was cut in half on that day, too. Even people who don't understand the specific inner workings of biotech can get a handle on this type of company. POZEN has one area of focus. That fact alone dramatically increases the risk of owning the stock. I could be wrong, but the fact that the firm has received non-approval letters on two drugs in its primary area of study leads me to believe it is not very good at what it does.
As we Fools seek out investments in biotech, we can learn from the mishaps of POZEN and know how to reduce our single-stock risk by sticking with companies that boast diverse product lines.
What are your thoughts on POZEN? Share them with other Fools on the Biotechnology discussion board.
Fool contributorRoger Nusbaumis an investment manager and wildland firefighter in Prescott, Ariz. At press time,neither he nor his clients owned any of the stocks mentioned.