Why Endocyte Inc. Shares Plummeted in After Hours

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Endocyte (NASDAQ: ECYT  ) , a biopharmaceutical company focused on developing small molecule drug conjugates to fight cancer and other inflammatory diseases, plunged 17% in after-hours trading after Merck (NYSE: MRK  ) announced it would be returning all worldwide rights of investigational cancer therapy vintafolide to Endocyte.

So what: According to Endocyte's press release, vintafolide partner Merck has decided not to pursue development of the drug, and will return all worldwide rights to Endocyte. Merck walking away means no more financial backing to run additional trials, and the absence of an experienced sales staff to help sell vintafolide were it to find success in other indications. Endocyte plans to evaluate the future development of vintafolide based on additional data from its phase 2b TARGET trial targeting patients with non-small cell lung cancer. While the TARGET trial already met its primary endpoint of improved progression-free survival, Endocyte will wait to see updated overall survival data before making its call on whether or not to proceed.

Now what: With shares valued as of this writing at just $30 million above its cash value, including its April share offering, it's evident that investors aren't giving Endocyte much chance of success. While I'm certainly not going to construe vintafolide's failure in its phase 3 platinum-resistant ovarian cancer trial as a good thing, or Merck walking away from the table as a positive, we also have to keep in mind that different cancer types can respond differently to the same medication. What didn't work in platinum-resistant ovarian cancer could be wildly successful in NSCLC -- but we just don't have all the data yet. Of course, Endocyte will continue to burn cash in the meantime as it conducts its studies, so investors should also understand that its $233 million in cash isn't going to last forever. All things considered, however, this drop could represent an opportunity for risk-taking, biotech-savvy investors to begin dipping their toes into the water.

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