Biotech stocks are infamous for their volatility. One wrong step on the clinical or regulatory front can send a company's shares plunging.
Adding to their often nauseating ways, biotechs can also recover nearly as fast as they fell, generating substantial returns for investors willing to risk catching a so-called "falling knife." With that in mind, let's look at three biotech stocks that have plummeted over the past three months: Aegerion Pharmaceuticals (NASDAQ: AEGR), Insys Therapeutics (INSY), and Prothena (PRTA -2.63%).
Aegerion lost over half its value in the first quarter
Shares of the orphan-drug maker Aegerion dropped over 53% in the first quarter. This precipitous drop had two underlying catalysts. First was the Department of Justice investigation into the company's marketing practices for its drug Juxtapid, indicated as a treatment for homozygous familial hypercholesterolemia, or HoFH. The company has vowed to vigorously defend itself, and it may have solid legal grounds to do so.
The second issue is more problematic. After the company reported first-quarter earnings earlier this month, shares dropped over 25% in a single day. Investors were obviously displeased with the $6.6 million miss in sales for Juxtapid, followed by a downward revision for projected full-year 2014 sales.
So is Aegerion now a buy? I'm going to say no. Aegerion's flagship drug could face even more competition from major pharma companies moving into the HoFH space next year, and the company offers little in the way of additional value drivers.
Insys has been a bad-news magnet lately
Insys shares cratered over 40% in the past quarter, catalyzed by two events. During the first quarter, a top prescriber for Insys' cancer pain drug Subsys was arraigned in federal court for writing unnecessary prescriptions and the unlawful distribution of a controlled substance. According to subsequent reports, this particular doctor was responsible for a substantial portion of Subsys' total scripts to Medicare patients.
Insys also missed on earnings and revenue for last quarter.
Insys' future appears murky, so I would avoid trying to catch this falling knife in hopes of playing the rebound game.
Was Prothena's fall warranted?
Prothena shares cratered nearly 35% following a data release for an early stage trial for its experimental treatment for AL amyloidosis and persistent organ dysfunction. NEOD001 is a monoclonal antibody that could become the first approved treatment for this devastating disease.
That being said, investors were clearly looking for some signal that the therapy was making an impact on AL amyloidosis patients. When the results were discussed during a conference call, I think the sheer complexity of the disease and NEOD001's mechanism of action confused investors tremendously.
First and foremost, early stage studies are not intended to show signs of effectiveness. Rather, they are meant to ensure that the drug doesn't cause potentially serious adverse effects before being used in a wider patient population. And for the most part, NEOD001 met this study objective.
Should you get Prothena on your watchlist? I'd say yes. Prothena has a strong cash position and aims to treat a disease with no approved therapies. While it's still a highly speculative biotech -- and this is a therapy in very early stages -- it's worth keeping an eye on.
Foolish wrap-up
Of the three stocks discussed above, I think only one has a real shot of making a comeback, namely Prothena. I think the company's fall was based on unrealistic expectations for an early stage study, or perhaps a general misunderstanding of the results. Even though the small trial wasn't intended to examine efficacy, it offered some signals that the therapy could potentially work. Management appears to agree with this assessment, making a handful of direct stock buys on the open market following the dramatic drop in share price. By contrast, the future looks uncertain for both Aegerion and Insys. You may want to pass on these two biotechs.
