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Day of Disaster for These 2 Pharma Stocks

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Disastrous. That's the best one-word description of Monday's announcements by two pharmaceutical companies, Peregrine (Nasdaq: PPHM  ) and Questcor (Nasdaq: QCOR  ) . Questcor shares dropped more than 36% -- and it was the more fortunate of the two stocks. Peregrine shares plunged by more than 78%.

What happened, and what does it all mean for wary investors? Let's take a look.

Questcor's latest misfortunes stem from the company's announcement that the U.S. government is investigating the company's "promotional practices." The company said it's cooperating with the investigation.  

Hints of potential issues arose in July from allegations made by Andrew Left's Citron Research. Citron accused Questcor of using questionable methods to market its Acthar gel for diseases other than infantile spasms, for which the FDA granted Acthar orphan drug status. According to Citron, Questcor allegedly aggressively marketed the drug for other uses at the same price levels made possible by its orphan drug designation.

Other drug companies have paid dearly after being investigated for marketing practices. Johnson & Johnson (NYSE: JNJ  ) , for example, settled with the U.S. government in June for as much as $2.2 billion over allegations that the company paid kickbacks and tried to sell Risperdal for conditions other than those approved by the FDA. Last year, Amgen (Nasdaq: AMGN  ) settled for $780 million over its alleged illegal sales and marketing of its Aranesp anemia drug.

The announcement of the government's investigation of Questcor comes on the heels of last week's decision by Aetna (NYSE: AET  ) to greatly restrict its reimbursement for Acthar. Perhaps the company will be found to have committed no wrongdoing with its market practices. Maybe other insurers won't clamp down the way Aetna did. Big question marks prevail at this point, though.

An even bigger disaster on Monday was the statement from Peregrine that previously reported clinical results from its bavituximab drug contained major discrepancies. As recently as Sept. 7, the company announced very positive results from its phase 2 trials of the drug. Now, those results have been discredited.

Peregrine's trading status with Nasdaq was in jeopardy earlier this year. The stock traded below $1 per share for more than 30 consecutive days. Peregrine faced a deadline of Sept. 24 (ironically, the day of the study discrepancy announcement) to boost its shares above the threshold for at least 10 consecutive days. Failure to do so could have ultimately gotten the stock delisted from the exchange.

However, by mid-July, Peregrine shares climbed above the $1 mark. Within a couple of weeks, the company regained Nasdaq compliance. Boosted in no small part by the phase 2 results reported in early September, the stock jumped as high as $5.50 per share last week. Now, shares have plunged nearly back to the $1 level.

The news of the study discrepancies are undoubtedly infuriating to investors who bought shares based on the seemingly good results. While the company attributed the errors to a third-party contractor, Peregrine bears the responsibility for the accuracy of reported information.

As with Questcor, question marks loom large for Peregrine. Maybe the true results from the phase 2 studies will reflect impressive outcomes similar to the previously reported information. If so, the stock will rebound. If not, the only ones likely to make money will be the lawyers waging the inevitable lawsuits over this fiasco.

The events from Monday should be illuminating for investors as they consider buying smaller pharma stocks down the road. The announcements from Peregrine and Questcor underscore the volatility of the industry. Unforeseen circumstances occur with both large and small pharmaceutical companies. If you haven't yet subscribed to the theory of managing risk through diversification, just imagine that your entire portfolio was in these two stocks on Monday.

The disastrous day for these companies also reminds us to do our homework before buying stocks. Reports like the one from Citron in July, whether ultimately proven accurate or not, shouldn't be summarily dismissed without further research. Of course, probably no amount of homework could have provided a warning flag about the clinical result discrepancies for Peregrine.

Finally, investors should remember that while bad news gets the most press, there actually is still plenty of good news out there. Many pharma companies continue to plug along with innovative new drugs that will help people across the world. These same companies possess the potential to produce tremendous profits for astute investors. Thankfully, most days and most companies aren't disasters.

One great approach to help mitigate the risk of disaster for investors with pharma stocks in their portfolios is to add some dividend-paying stocks. Check out The Motley Fool's free special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks" for several excellent investing ideas. Get your free copy now by clicking here!

Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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