March was pretty rough for the biotech sector, but the drop in some biotech stocks was simply breathtaking. Celldex Therapeutics (NASDAQ:CLDX), Acceleron (NASDAQ:XLRN), and Newlink Genetics (NASDAQ:NLNK) all tumbled more than 25% last month -- far more than the 10% drop in the iShares NASDAQ Biotechnology Index (NASDAQ:IBB) ETF.
However, big pops and drops aren't uncommon in biotech, so let's consider the catalysts that drove shares lower and see whether shares may bounce back.
Using the body to fight cancer
It shouldn't surprise biotech investors when highfliers fall back to earth, yet that's what seems to have happened at Celldex, one of biotechnology's biggest winners last year.
Excitement over Celldex's gene targeting immunotherapies sent shares rocketing more than 200% higher last year. However, profit takers sent Celldex shares reeling by nearly 40% in March.
Celldex is further along in clinical trials than many of last year's top-performing biotechs. Its lead drug is rindopepimut, a phase 3 therapy for a rare form of brain cancer known as glioblastoma. In December, Celldex updated results from rindopepimut's previous phase 2 trial, showing that 51% of those treated with the drug survived two years. That was far better than the 6% rate typical for the disease.
In addition to rindopepimut, Celldex is using technology from Seattle Genetics in CDX-011, a breast cancer drug that's in phase 2. CDX-011 received the Food and Drug Administration's fast-track designation back in 2010 following solid results in phase 1/2 studies.
Since Celldex has two promising compounds quickly making their way through clinic, you're right to wonder why shares dropped. It could be investors simply got a little ahead of the potential to commercialize rindopepimut given the phase 3 trial isn't expected to complete enrollment until halfway through this year. If so, that would put interim data in front of investors either late this year or early in 2015. More likely, rolling markets encouraged investors with big gains to ring the register and lock in profit. After all, any number of things can derail even the most promising drugs in trials.
Boosting red blood cells to battle anemia
Acceleron's roller-coaster returns are another example of the volatility associated with investing in emerging biotech stocks. After its initial public offering last fall, shares in the company took off, jumping 170% into year-end. However, stalling markets caused shares to slump 26% in March.
Investors who sold into that drop were probably shaking their heads when shares spiked 13% on April 2 after Celgene (NASDAQ:CELG) agreed to buy 1.1 million shares for $47 million. Since Celgene already owned 3.5 million shares in Acceleron heading into this latest purchase, its ownership stake is now just shy of 15%. That's a big vote of confidence.
The two companies began their relationship in 2008 when Celgene agreed to collaborate on Sotatercept, a red blood cell boosting compound for diseases including myelodysplastic syndromes, chronic kidney disease, and multiple myeloma.
Most recently, Sotatercept entered phase 2 as an anemia treatment for end stage kidney disease in December, triggering a $7 million milestone payment. However, that payment is a pittance compared to the $360 million Celgene may eventually pay Acceleron in regulatory and commercial milestones.
Acceleron has seven studies ongoing for Sotatercept, including a phase 2 multiple myeloma trial that reached its primary completion date for collecting data in February. Investors will have to wait longer for insight into the just-launched Sotatercept trial for end-stage kidney disease given its primary completion date isn't until September 2015.
Similar to Celldex, Newlink is working on immunotherapies for cancer, but unlike Celldex, Newlink reported somewhat disappointing news on one of its clinical compounds in March. That sent shares tumbling 36% last month after more than doubling in January and February.
Investors were apparently hoping independent monitors would halt Newlink's ongoing phase 3 trial of algenpantucel-L for pancreatic cancer in March when it reviewed interim results, but monitors recommended the trial continue to its completion date instead.
The monitors will take another look at data once 333 patient events occur (this one came after 222 events), and if they decide to continue again the final data will be digested at 444 events. That leaves investors with nothing but question marks for now.
Foolworthy final thoughts
If you're going to invest in biotech, you're going to need pretty thick armor, especially if you're going to venture into clinical-stage companies. Shares in emerging biotech are heavily dependent on the news of the day, which makes them particularly boom and bust.
Since investors tend to overreach on both the way up and on the way down, there may be an opportunity in these companies, but only for the most speculative, risk-taking investor. Otherwise, investors should stay on the sidelines until these companies mature or look for opportunities elsewhere.
Todd Campbell owns Celgene. He owns E.B.Capital Markets, LLC, whose clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC, whose clients do not have positions in the companies mentioned. The Motley Fool recommends Celgene. Try any of our Foolish newsletter services free for 30 days. 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.