What happened

Shares of Acceleron Pharma (NASDAQ:XLRN) jumped exactly 24% last month, according to data provided by S&P Global Market Intelligence. That follows a 10.2% drop from July. What's going on?

The volatility actually isn't that surprising. Acceleron Pharma stock gained 42% on a single day at the end of June following encouraging data from a late-stage drug candidate. The data were promising enough for analysts to assume the drug candidate would receive marketing approval from the U.S. Food and Drug Administration. Despite that, Wall Street can't seem to make up its mind on the proper valuation for the pharma company. There's a good reason for that.

A businessman drawing a yellow step chart with a positive trend.

Image source: Getty Images.

So what

The late-stage drug candidate that reported results at the end of June was luspatercept, which is being developed with Celgene as a treatment for a group of rare blood disorders called myelodysplastic syndromes (MDS). The pharma giant thinks the drug could see peak sales of $2.2 billion. That would be pretty sweet for Acceleron Pharma considering it can receive up to $185 million in milestone payments, will split profit and loss in North America, and can earn royalties of at least 20% globally.

However, with a market cap of just $2.3 billion, some analysts have floated the idea that Celgene might just acquire Acceleron Pharma. Well, the 87% it doesn't already own. That idea might not be as crazy as it sounds, especially when considering the other promising mid-stage assets in the smaller company's pipeline.

Now what

In most cases, it's risky business for biopharma investors to assume that market approval is a slam dunk. Predicting that an acquisition is imminent is crazier still. However, there's a case to be made that Acceleron Pharma is undervalued at its current $2.3 billion market valuation. Investors with an above-average stomach for risk may want to poke around the company's financial statements and pipeline.

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.