What happened

Shares of Kadmon Holdings (KDMN), a biopharmaceutical company, jumped by as much as 25.1% Tuesday morning in response to a positive result from a pivotal study of its most valuable treatment candidate, KD025. Enthusiasm for the stock has faded somewhat during the afternoon, and as of 2:50 p.m. EST, its price was just 14.4% higher.

So what 

Kadmon badly needs a new product to sell because its only source of revenue at the moment is ribavirin, an obsolete antiviral formerly used to treat the hepatitis C virus. Investors breathed a sigh of relief Tuesday at the results from the KD025 trial.

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Image source: Getty Images.

Kadmon reported top-line results from a clinical trial with bone marrow transplant recipients who were experiencing chronic graft-vs-host disease (cGVHD). An impressive 64% of patients that took 200 mg of KD025 daily exhibited a response to treatment, and 67% of those that took 200 mg twice a day were responsive.

Now what

Kadmon intends to submit an application to the FDA early next year for approval of KD025 as a treatment for cGVHD, but the drug could run into a well-known competitor before it gets off the ground. Incyte's (INCY 0.77%) Jakafi is myelofibrosis drug that earned approval as a treatment for acute GVHD this year. By the end of 2019, Jakafi should be ready to make public the interim results from its trial in cGVHD patients, called Reach3.

Successful results in that trial could be particularly damaging to KD025's potential launch because the Reach3 trial isn't an open-label test. Investigators are adding Jakafi or a placebo to standard treatment to see if Jakafi actually works. There are no good reasons to explain why Kadmon didn't bother to include a placebo group in its  KD025 study, but there are too many bad ones to ignore.

Investors should also know that Kadmon's CEO, Harlan Waksal, is Sam Waksal's brother. You may recall Sam Waksal was sentenced to 87 months behind bars in 2003 for insider trading violations he committed while the head of ImClone. After learning the FDA would not grant approval for ImClone's lead drug candidate, he called up friends and family members who had invested in his company and warned them to dump their shares. Sam Waksal did this before notifying the public, then lied about his actions to federal investigators.

Sam Waksal co-founded Kadmon with his brother Harlan, and exited it immediately after earning a heap from its initial public offering in 2016. Since then, this biotech stock has lost 64% of its value. If the trial results announced Tuesday don't impress the FDA due to the lack of a control group, the stock could fall much further.