When Binary Events Become Biotech Bloodbaths

Biotech investors live for the binary event, when a single piece of news -- be it a trial result or an FDA decision -- can instantly double an investment. Take buyout candidate Theravance (Nasdaq: THRX  ) , which recently popped 20% on news that GlaxoSmithKline (NYSE: GSK  ) upped its stake in the small biotech to 27%.

But with the possibility of sudden riches comes big risks -- risks that new investors drawn to seemingly easy gains sometimes fail to grasp. Consider these three biotech bloodbaths from just this week a convenient reminder.

First up is the less-than-dynamic duo of Keryx Biopharmaceuticals (Nasdaq: KERX  ) and AEterna Zentaris (Nasdaq: AEZS  ) . Hopes were sky high that lead drug candidate perifosine would ace a phase 3 trial dubbed X-PECT focusing on a subset of the phase 2 trial's most receptive patients. I'm guessing investors in either biotech didn't X-PECT a 65% share-price drop, but that's what happened when perfosine couldn't meet its goal.

Perifosine's failure treating colorectal cancer hasn't doomed the drug to the waste bin -- yet. But the drug's phase 3 trial for multiple myeloma is in jeopardy as the management "carefully evaluates" it, citing recruitment difficulty. There was no word yet about its phase 2 trials treating several other cancers.

AVI BioPharma (Nasdaq: AVII  ) , which saw a near 30% decline in its shares, is a slightly different animal. Its muscular dystrophy drug etepliersen worked at a biological level by increasing dystrophin-containing muscle fibers, but not where it mattered: helping patients walk. With AVI's expensive phase 3 trial on the horizon, only $40 million in the bank, and cash burn approaching $35 million over the past 12 months, investors sticking with this stock can probably look forward to dilution.

For investors holding on to an investment suddenly worth significantly less, there is a glimmer of hope. As usual, when a trial goes poorly, biotechs tend to focus on the positives. Both Keryx and AEterna touted other drugs in their pipelines. For Keryx, it's Zerenex in phase 3 trials, and for AEterna, its more robust pipeline includes AEZS-130 and AEZS 108 in phase 3 and phase 2 development. AVI management, gearing up for a phase 3 trial, is optimistic that over a longer regimen patients could see tangible results.

However, these companies live off hope, so don't just look at the sell-off and assume shares are cheap. Do your homework, understand the risks involved, and have a firm grasp on what you can afford to lose, if a binary event turns into a biotech bloodbath.

A better approach
Motley Fool co-founder David Gardner recently identified a small-cap health-care company that is poised for monster returns, without worrying about trial failures. To uncover this top pick today, take a look at our special free report, "Discover the Next Rule-Breaking Multibagger." Don't miss out on this limited-time offer and your opportunity to discover this game-changing company before the market does. Access your report -- it's totally free.

David Williamson holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline. The Motley Fool has a disclosure policy. We Fools don't 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.


Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2012, at 8:30 PM, Yrral13 wrote:

    Another pro GSK article bashing a competitor............no conflict ? you fools

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1854802, ~/Articles/ArticleHandler.aspx, 11/28/2014 9:43:58 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement