Many stocks lost value in the final month of 2018, but the riskiest ones truly had a December to forget. Small-cap biopharmas were among the worst performers.
Shares of Adamas Pharmaceuticals (ADMS) lost 16.6%, according to data provided by S&P Global Market Intelligence. But that was better than the 22.7% tumble taken by AVEO Oncology (AVEO) stock and the devastating 45% plunge in shares of Achillion Pharmaceuticals (ACHN).
Should investors take Wall Street's hint and stay away from these pharma companies?
Adamas Pharmaceuticals may have been the best performer in the small-cap trio in December, but it dropped more than 70% in 2018 -- by far the worst of the bunch. The company simply couldn't catch a break last year despite launching its first commercial product in January 2018. Gocovri, approved to treat the symptoms of Parkinson's disease, might wind up becoming a blockbuster drug with over $1 billion in annual sales, but analysts seemed to be a little impatient with the drug's start out of the gate.
On the one hand, Gocovri generated just $20.7 million in revenue through the first nine months of 2018. Considering Adamas Pharmaceuticals reported an operating loss of $89 million and burned $89 million in cash from operations, perhaps it's only right that a little nervousness is beginning to creep in.
On the other hand, Gocovri is right on track according to both company and Wall Street expectations. The company is also poised to begin receiving royalty payments in the low to mid-teens millions on sales of dementia drug Namzaric beginning in May 2020. Allergan reported total sales of $93 million for the drug through the first nine months of 2018. In other words, the future looks promising for the punching bag named Adamas Pharmaceuticals.
Mr. Market continues to be sour on AVEO Oncology after its surprise European marketing approval for its kidney cancer drug Fotivda in 2018. While the drug recently launched with partner EUSA Pharma, analysts are fretting over the small-cap company's cash position. It ended the third quarter of 2018 with just over $20 million in cash on hand.
That simply won't be enough to hit the ground running with Fotivda's commercial launch in Europe or to support ongoing development efforts, including studying a combination therapy with AstraZeneca's Imfinzi in liver cancer. More pressing for investors is the fact Fotivda will be under regulatory review in the United States by mid-2019, which means AVEO Oncology will need to prepare for a possible commercial launch in 2020. In other words, investors are pricing in some painful dilution that seems inevitable.
Shareholders of Achillion Pharmaceuticals might wish they had the problems listed above. Instead, last month they learned that the small-cap pharma company was discontinuing the development of a pipeline asset intended to treat the rare blood disorder paroxysmal nocturnal hemoglobinuria (PNH). It will instead shift its focus for the disease to earlier-stage assets, which will push the development timeline back a few years.
While the company announced positive data for two other clinical programs, analysts were grasping for more detailed information from the clinic. Achillion Pharmaceuticals didn't give in to those demands, which pushed investors toward the exits.
Investing in small-cap pharma companies is always accompanied by a fair amount of risk, especially when they don't have a commercial product on the market to balance out the binary risk that comes when the stock's movement depends solely on a clinical trial's success or failure. That makes Achillion Pharmaceuticals about as risky as they come.
That said, earning marketing approval for a drug doesn't guarantee success either. In fact, it often just creates different problems outside of the clinical environment, which shareholders of AVEO Oncology and Adamas Pharmaceuticals are well aware of now. Investors might be better off staying away from the former until it can sort out its cash problems and demonstrate the ability to become a sustainable business. And although the latter likely will need to raise more cash in 2019, it at least has a path to sustainable and profitable operations. That could make it worth a closer look for investors.
Check out the latest Adamas Pharmaceuticals earnings call transcript.