What happened

A surge in second-quarter revenue year-over-year was more than offset by pessimism following a cut to the company's full-year revenue guidance, and as a result, shares in Tesaro Inc. (NASDAQ: TSRO) were tumbling 16.1% at 1 p.m. EDT Friday.

So what

Tesaro has two commercial drugs on the market, but sales of one of those drugs is declining sharply after a setback and the other drug is fighting tooth-and-nail for a share of a highly competitive marketplace.

A man holds his head in his hands as he looks at a declining stock price chart.

Image source: Getty Images.

In Q2 2018, sales of the company's chemotherapy-induced nausea and vomiting drug, Varubi, continued to nose-dive following management's decision to curtail the distribution of an IV formulation that won FDA approval last year, but was later associated with anaphylaxis in patients. In Q2, revenue was $2.9 million, down from $4.5 million in Q4, 2017 prior to its decision to divest the product.

Varubi's decline was more than offset by significant revenue growth for Zejula, a PARP-inhibitor that's approved to treat ovarian cancer. In Q2, Zejula's sales were $54 million, up from $26 million in Q2 2017. Despite Zejula's rapid run-up, management lowered its outlook for its sales for the rest of 2018. It now expects Zejula sales of between $225 million and $235 million, which is down from the previous expectation of $255 million to $275 million.

Also, Tesaro announced it's sold its Varubi rights to TerSera Therapeutics LLC for $40 million plus milestones and royalties on future sales. After considering the impact to revenue from the lowered Zejula guidance and the Varubi divestment, Tesaro now thinks full-year revenue will be between $250 million to $265 million, which is down from the previous estimate of $310 million to $345 million.

Now what

Tesaro's studying the use of Zejula in multiple additional indications, including breast cancer and lung cancer. Eventually, that could increase its addressable market and boost sales. However, Zejula isn't the only drug that inhibits PARP proteins that can repair damaged cancer cells. AstraZeneca markets the PARP-inhibitor Lynparza and Clovis Oncology markets the PARP-inhibitor Rubraca.

Zejula's demonstrating that it can compete in this crowded market, but the cut to guidance increases uncertainty that these companies can differentiate their drugs enough to avoid having to compete on price. Instead, Tesaro will need to outmaneuver competitors by winning label expansions, and since there's no guarantee of clinical-trial success, that's enough to make investors a tad uneasy.

Further out, Tesaro is investing in its research and development pipeline in hopes of securing approvals for a checkpoint inhibitor, TSR-042, that targets PD-1, as well as other cancer antibodies. It's anyone's guess, though, if trials of those drugs will pan out.