What happened

Shares of Zogenix (NASDAQ:ZGNX) closed Monday about 8.5% lower, a decline precipitated by the biotech's announcement that it plans to acquire privately held Modis Therapeutics for $250 million. 

So what

Investing in biotech stocks, especially clinical-stage biotechs, is fraught with risk for a number of reasons. Zogenix's drop on Monday highlights the downsides of such companies making moves that their shareholders don't like. The sentiment on Wall Street appears skeptical when it comes to the decision to buy Modis, which has only one pipeline candidate -- MT1621, a drug that targets treatment of  thymidine kinase 2 deficiency (TK2d), a rare genetic disease. 

Businessman drawing big fish about to eat little fish

Image source: Getty Images.

Modis recently completed a phase 2 clinical study evaluating MT1621 in treating TK2d; patients who took the drug achieved statistically significant improvement in survival probability and functional abilities. "Based on the compelling clinical data generated to date, we believe that MT1621 has the potential to significantly alter the course of the disease and improve outcomes in patients with TK2d," Zogenix CEO Stephen Farr said.

Given that Modis comes with a promising drug for a disease that has no approved therapies so far, why aren't investors happy about the acquisition? Probably because Zogenix isn't in the best financial position to be making deals. The company continues to lose money. It doesn't have an approved product on the market yet. And at the end of June, Zogenix's cash position stood at $463 million. 

Buying Modis means that Zogenix will have significantly less cash on hand. Investors likely worry that the company could have to raise more capital by issuing new shares if the U.S. Food and Drug Administration (FDA) puts up any barriers to a relatively quick approval for MT1621, or if Zogenix's own drug candidate to treat Dravet syndrome, Fintepla, fails to win FDA approval.

Now what

There are several things for investors should watch with regards to Zogenix in the near term. The company plans to resubmit its filing for FDA approval of Fintepla in September. Fintepla is already under review by the European Medicines Agency (EMA). In addition, Zogenix plans to meet with both U.S. and European regulators on an accelerated approval pathway for MT1621, assuming the acquisition of Modis is finalized. The deal is expected to close next month.

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.