Avoid This Biotech Stock

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Company Ironwood Pharmaceuticals (Nasdaq: IRWD  )
Submitted by zzlangerhans
Member Rating 99.56
Submitted on 10/27/2011
Stock Price at Underperform Recommendation $14.19
Ironwood Pharmaceuticals Profile
Star Rating (out of 5 stars) *
Headquarters Cambridge, Mass.
Industry Biotechnology
Market Cap $1.35 billion
Industry Peers

Abbott Laboratories (NYSE: ABT  )

Adolor (Nasdaq: ADLR  )

Nektar Therapeutics (Nasdaq: NKTR  )

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
With this pick, I now have 9 of the 80 thumbs Ironwood has garnered in the 20 months since I announced the company's birth to CAPS. For some reason my interest in the stub is disproportionate to that of the community as a whole, but I find their volatility fascinating as well as profitable in terms of CAPS points and accuracy.

The bull story for Ironwood is the run up before the PDUFA for irritable bowel drug linaclotide in June 2012. There's a very high likelihood that the FDA will approve the drug, given solid phase III data and an unmet medical need. They also have strong partnerships for the drug in the US and Europe. That makes Ironwood an attractive buy under 10.

The bear thesis is that regardless of what happens with the PDUFA, the vast majority of newly approved drugs from small and mid-sized pharmas have been disappointing underperformers in sales. This may or may not happen to linaclotide, but several quarters will be necessary after approval before Ironwood can prove they can justify their lofty valuation. After approval, traders will flee the stock and it will almost certainly dip even if the drug eventually proves successful. Meanwhile, Ironwood has no track record of FDA success and it is very possible that the FDA may find sufficient flaws in the NDA to justify a CRL. Given the lack of other compounds in clinical trials, that outcome would crush the stock. Put options might be interesting if the share price rises back above 16 prior to the PDUFA.

Despite the fact that events have unfolded in a very predictable manner, the stock has been extremely volatile over the last year. Traders seem to think that global economic events somehow affect the likelihood that linaclotide will be approved by the FDA. Today they seem to have become much more optimistic about linaclotide because of a new European bailout plan for Greece. Weird.

Well, here's the thing. I've heard this bailout story half a dozen times over the last two years and I'm not buying it. The more everyone else buys it, the harder the market will crash when it turned out that it didn't really make any difference and Greece is going to default after all. And when that happens, Ironwood stock will be headed back to 10 or lower if the previous pattern holds.

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Abbott Laboratories. 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.


Read/Post Comments (1) | Recommend This Article (3)

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  • Report this Comment On December 07, 2011, at 10:48 PM, cfelong wrote:

    Irritable Bowel Syndrome is the one everyone likes to medicate because there is no money to be made by the most likely solution. Changing your diet. I can't tell you how many people get better when they go on gluten free diets, myself and 4 sisters included. Beware of solutions searching for problems.

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