What happened

Shares of biopharma Dermira (NASDAQ:DERM) fell off a cliff today, losing over 64% at their worst, after the company announced that a lead drug candidate failed two separate phase 3 trials. The drug candidate, DRM01 (olumacostat glasaretil), was being evaluated as a potential treatment for acne. When compared to an inactive topical gel, the drug candidate failed to show any significant improvements by any measure, according to the initial data analysis. Not a single endpoint was met. 

Dermira said that although it was still reviewing the data, it doesn't expect to continue developing DRM01. The news is all the more shocking considering the drug candidate showed robust results in an earlier phase 2 study with a randomized and controlled design (read: not some poor excuse for a trial).

As of 11:45 a.m. EST Monday, the stock had settled to a 63.9% loss.

A finger pointing at a stock chart showing losses displayed on a screen.

Image source: Getty Images.

So what

This is a devastating loss for Dermira. Not only was DRM01 the company's lead drug candidate, but it was poised to create a new market for acne treatment, especially after Novan and Foamix Pharmaceuticals each reported phase 3 failures for similar drugs in early 2017. In fact, the lack of competition and glowing results from a midstage trial encouraged the company to take on debt in May 2017. Oops. 

The discontinuation of DRM01 development leaves the biopharma with two drug candidates on which to focus its near-term attention. The first is glycopyrronium tosylate, which successfully completed its clinical testing as a treatment for primary axillary hyperhidrosis (a fancy way of saying excessive underarm sweating). It's awaiting a decision on marketing approval from the U.S. Food and Drug Administration. If approved, it could be commercially launched in the second half of 2018.

The second drug candidate is lebrikizumab, which is currently being evaluated in a phase 2b trial as a potential treatment for eczema. Dermira has high hopes for the developmental therapy but doesn't expect to announce top-line results until the first half of 2019.

Now what

Losing a top drug candidate in such surprising fashion -- and for such a potentially large market -- certainly hurts Dermira. While the company ended 2017 with $551 million in cash and cash equivalents, it was also losing over $50 million per quarter and owns $280 million in long-term debt. It's possible that the market is overreacting to the news, but a significant amount of uncertainty was just injected into the business and the stock. Investors may be better off seeing how management begins to pick up the pieces before jumping into this one.

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.