What happened

Shares of Ampio Pharmaceuticals (NYSEMKT:AMPE) were devastated today, dropping 71% in the first hour of trading, after the company delivered a regulatory update in a Securities and Exchange Commission filing concerning its lead drug candidate Ampion. The drug, which is being developed as a treatment for severe osteoarthritis of the knee, appeared to report positive results in a phase 3 trial at the end of 2017. But investors just learned that the data collected will not be sufficient to support regulatory approval. 

According to the filing, when Ampio Pharmaceuticals and the Food and Drug Administration (FDA) met in July, the regulatory body said it could not consider Ampion for marketing approval because the recently completed phase 3 clinical trial was not "adequate and well controlled." The FDA recommended that the company "perform an additional randomized trial with a concurrent control group."

As of 11:39 a.m. EDT on Wednesday, the stock had settled to a 67.3% loss.

A rising chart takes a sudden downward turn.

Image source: Getty Images.

So what

Investors can't argue that today's news is a complete surprise. Back in January, industry analyst and STAT's national biotech columnist Adam Feuerstein warned investors of the exact issues raised by the FDA in the July meeting.

That is, the phase 3 trial conducted for Ampion didn't compare the drug candidate to a control group. Instead, Ampio Pharmaceuticals reported how patients felt before and after taking the experimental therapy. Feuerstein stated that this very likely wouldn't be enough to gain marketing approval. Turns out, he was right.

Now what

Ampio Pharmaceuticals stock is right back where it was last summer: below $1 per share. But investors shouldn't automatically assume that the now-$70-million pharma company is a bargain. At the end of March, the business had just $7.5 million in cash and cash equivalents and shareholders' equity of negative $8.8 million. Running additional clinical trials for Ampion will take time and will be costly, so until more certainty is provided about the path forward (and likely even after that, given this company's history of not delivering success), investors should stay away from this penny stock. 

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.