What happened

Shares of specialty generic pharmaceutical manufacturer Teligent (NASDAQ:TLGT) dropped as much as 46% today after investors digested the company's third-quarter 2017 results. Operations appeared to have slowed after a strong first half of the year. That forced management to lower its full-year 2017 financial guidance for revenue and gross margin. 

Compared to the year-ago period, revenue slipped 15% and gross margin deteriorated significantly following pricing pressures for two of Teligent's leading products. Increased competition was mostly to blame. While that's completely expected for the company's business model, investors are worrying the the launch of new products isn't closing the gap quickly enough -- a fair criticism.

As of 1:06 p.m. EST, the stock had settled to a 40.9% loss.

A businessman standing on a bar chart cartoon that is showing losses.

Image source: Getty Images.

So what

The primary investment thesis for Teligent is that it has the potential to be at least a moderate growth stock for years to come. The business model is simple: Identify specialty products coming off patent in the near future that require a bit more effort to manufacture, complete the necessary paperwork, and then launch as soon as legally possible to reap the rewards at stake for early generic versions of a drug.

These rewards fade over time -- sometimes in a matter of a few quarters -- so companies mitigate that risk by expanding their portfolio to dozens (or hundreds) of generic drugs. Most contribute very little in the long run, but incremental revenue can add up quite a bit over dozens of products.

Of course, there are risks to the business model, which were on full display in the third-quarter 2017 earnings. Despite revenue from 25 different products and 32 Abbreviated New Drug Applications (ANDAs) on file, revenue generated from its top two products -- a disproportionate amount of total revenue -- has dropped significantly since last year. The company had to lower prices to keep pace with the competition, which cut into gross margin. It also lowered its full-year 2017 revenue guidance to $65 million to $67 million, down from the previous range of $75 million to $85 million as a result.

Now what

A haircut of over 40% is a pretty extreme reaction by investors. Is it warranted? Well, the high-growth potential of Teligent seems to be open to criticism after the performance in the most recent quarter. The inability to generate profits will hurt business expansion prospects and the ability to clean up the balance sheet, which management promised to do with refinancing in 2018. Today's move serves as a good reminder that this business model, which is gaining steam across the pharmaceutical industry, is not without its own unique risks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.