Yesterday, Catalyst Pharmaceuticals (CPRX -2.77%), a small-cap orphan drugmaker, saw its shares tumble by as much as 20% on sky-high volume. This sizable downturn, in kind, prompted the company to issue a press release toward the end of the day's trading session essentially stating that management was unaware of any material event underlying this dramatic sell-off.
Nonetheless, the biotech's shares still ended the day down by an unsightly 16.7%, leaving shareholders wondering what the heck happened. Catalyst's stock, after all, had been in the midst of a fairly strong upward trend prior to yesterday's bloodbath. My take is that shareholders should basically shrug off Monday's unpleasant action and look to the future. Here's why.
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Nothing has changed
Why did Catalyst's stock tank on heavy volume? While the exact reason is obviously going to remain a mystery, I think the most plausible explanation is an end-of-the-quarter sale by a large shareholder -- perhaps an institution that didn't want a speculative small-cap biotech stock on its ledger. Monday, after all, marked the last full week of trading for the third quarter. Short-sellers, in turn, likely noticed these large sell orders early on in the day and pounced on Catalyst's shares for a quick profit, thereby amplifying the downward trend.
The point is that Catalyst's shares didn't crater in response to a material change in its underlying value proposition or near-term outlook. Keeping with this theme, there hasn't been an update on the company's civil suit against the FDA over Ruzurgi's approval since July 10; Firdapse's pivotal trials for congenital myasthenic syndromes and MuSK-MG remain on track, according to all publicly available sources; and the company reportedly doesn't plan on diluting shareholders anytime soon.
In short, the biotech's core investing thesis hasn't changed in the least in the past few days, despite yesterday's sharp decline. So if you thought this stock was worth $6.62 at the start of yesterday's session, there isn't a particularly good reason to believe otherwise now.
Time to buy?
Biotech stocks that nosedive in the absence of a material event can be stellar bargains. The fact of the matter is that biotech equities -- especially small-cap companies like Catalyst with only one approved product -- are exceptionally prone to massive daily price swings for a whole litany of reasons unrelated to their fundamentals.
Most of the time, though, small-cap biotech stocks that suddenly spike or crater out of the blue do tend to quickly revert to the mean. So, as Catalyst's stock currently sports a 50-day moving average of $6 per share, there's a decent shot that its shares will indeed recover, perhaps within a few short trading sessions.
What's the risk? Catalyst's upward momentum is predicated upon the notion that the sales of the company's Lambert-Eaton myasthenic syndrome drug Firdapse will continue to grow by leaps and bounds for years to come.
Unfortunately, the FDA's decision to green-light Ruzurgi earlier this year could prove to be a major stumbling block to Firdapse's commercial trajectory. So until this key overhang is favorably resolved, investors probably shouldn't go hog wild with this speculative small-cap biotech stock -- even after yesterday's pullback.
