What happened

Shares of rare-disease drugmaker Zogenix (NASDAQ:ZGNX) fell 11.4% in August, according to data provided by S&P Global Market Intelligence. That was a much worse performance than the S&P 500, which was only off 1.8% for the month.

This isn't the first wild monthly swing for Zogenix, nor is it likely to be the last. The pharmaceutical company's shares fell sharply in April and finished that month down 29.1%. That was swiftly followed by a 26.8% jump in June. Even with all the wild swings, shares are currently up 18.2% year to date, barely trailing the S&P's 19% gain.

A woman in a lab coat and safety glasses uses a pipette in a lab.

Small pharma companies hope a breakthrough treatment can help them outperform. Image source: Getty Images.

So what

People who follow Zogenix might be surprised to learn that the company's August drop had nothing to do with the issue that caused the April drop or the June pop. This time, there were issues surrounding the company's New Drug Application (NDA) for a drug called Fintepla, which is a potential treatment for a rare type of epilepsy called Dravet Syndrome.

Zogenix botched its initial NDA by omitting some animal data and submitting an incorrect set of clinical data. When the Food and Drug Administration (FDA) refused to accept the filing in April, the stock tanked. In June, though, the company announced it had successfully petitioned the FDA to resubmit its NDA in Q3 2019, which caused the stock to soar.

In early August, the company reported typically dismal financial numbers. Zogenix doesn't have a drug approved for sale yet, so it has virtually no revenue at this point. In mid-August, though, Zogenix announced it was purchasing another drug company, the privately held Modis Therapeutics, for $250 million, and that was what caused the big drop

Modis has a single drug in development -- currently named MT1621 -- that hopes to treat a rare DNA depletion disorder called thymidine kinase 2 deficiency (TK2d). Since Zogenix focuses on developing drugs to treat rare diseases, and TK2d currently has no approved therapies, the acquisition makes logical sense. 

Financially, though, investors are justifiably worried about the deal. Remember that Zogenix has no major revenue stream and is already burning through tens of millions of dollars every quarter on its own drug pipeline. The $250 million purchase price will consist of $175 million in cash -- which will eat into Zogenix's $463 million pool of cash and marketable securities -- and $75 million in stock, which dilutes current shareholder value.

Additionally, if certain milestones are met, Zogenix could be on the hook for an additional $150 million in payments, plus a 5% royalty payment on future sales. That was a big pill for investors to swallow, and instead, some of them fled the stock. 

Now what

Investing in pharmaceutical companies with no products approved for sale is risky business, as a single problem with a single product -- or product application -- can derail the company's fortunes. Zogenix is already in a precarious position thanks to its NDA mistake in April. The delay of its application allows rival Dravet Syndrome drug Epidiolex to gain an additional foothold in the market. 

That said, the Modis acquisition essentially doubles Zogenix's chances of getting a drug approved for sale, so if you're an investor who doesn't mind a heaping helping of risk in your portfolio, there are worse investments you could make.

Just be aware that additional share dilution is likely. This beleaguered drugmaker is far from a guaranteed winner. 

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.