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Why Shares of Stoke Therapeutics Plummeted in September

By John Bromels - Oct 8, 2019 at 4:35PM

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After top performance in August, the biotech was hit hard.

What happened

Shares of Stoke Therapeutics (STOK -0.89%) crashed 42.6% in September, according to data provided by S&P Global Market Intelligence. That was a dramatic turnaround for the young biotech, which just had its IPO in June. 

August's story was dramatically different. Despite a lackluster quarterly earnings report mid-month, the share price soared 52% to end August at $37.44. 

A group of people wearing lab coats and safety goggles in a lab

Stoke Therapeutics is one of a spate of recent biotech industry IPOs. Image source: Getty Images.

So what

Stoke's share price may have been a victim of its own success. According to its website, the company develops "medicines that increase gene expression to treat genetic epilepsies and other severe monogenic diseases, including genetic conditions affecting the central nervous system, eye, liver, and kidney."

Stoke hasn't released any news recently about the status of its products in development. However, numerous analysts initiated coverage of the company in July, when its share price was in the mid-$20s. Credit Suisse gave the company a price target of $35, while J.P. Morgan came up with a target of $34. 

In the absence of other news, it looks like investors, seeing that the company was now worth more than the analysts' price targets, simply decided it was a good time to cash out. That seems to have caused a snowball effect with other investors fleeing the stock. 

Now what

Stoke doesn't have any drugs in clinical trials yet. In fact, its best candidate for a clinical trial -- STK-001, a proposed therapy for Dravet syndrome, a severe form of genetic epilepsy in children -- hasn't yet been approved by the Food and Drug Administration. Stoke is still wrapping up toxicology trials, which it hopes to complete in early 2020. Assuming those are satisfactory, it will then be able to submit an investigational new drug application to the FDA.

Whether the share price is at $20 or at $40, any biotech that doesn't even have a drug in trials yet is a risky bet. Despite the sharp drop in shares, investors should probably steer clear until the company gets further into the development cycle.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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