On Monday, Feb. 10, Biohaven Pharmaceuticals (BHVN -2.39%) declared its anxiety medicine failed in a phase 3 clinical trial. The stock price dropped 8% in response to the news. Should investors be cautious or opportunistic following the latest turn of events?

Stock chart superimposed on stethoscope.

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What happened?

Biohaven's drug troriluzole did not perform better than placebo in a 402-patient trial to treat generalized anxiety disorder. The company stated that it does not intend to continue forward with the drug by itself in anxiety but will continue on-going clinical trials in other indications.

Troriluzole is a prodrug of riluzole, a long-standing, albeit marginally effective, treatment for amyotrophic lateral sclerosis (aka Lou Gehrig's disease). What's a prodrug? It's a derivative chemical structure that the body metabolizes or converts into the active drug -- in this case, riluzole. Mechanistically, Biohaven claims troriluzole can modulate an excitatory neurotransmitter called glutamate.

Biohaven continues to test troriluzole in three other diseases where glutamate has been implicated. Next quarter, the results for troriluzole as a treatment for obsessive compulsive disorder should be unveiled. A phase 2/3 clinical trial in Alzheimer's disease just passed an initial futility analysis allowing the trial to continue. Biohaven expects completion of the trial in the fourth quarter. Lastly, a clinical trial in spinocerebellar ataxia, a degenerative brain disease, should have results in 2021.

Should investors panic?

Troriluzole's failure heightens the speculation on whether the clinical trials testing the drug in other indications will follow suit, particularly for challenging ones like Alzheimer's disease. The simplistic view is to write off the program. Then, any positive results should only yield upside.

Biotech investors should take comfort that Biohaven's pipeline includes five drug candidates in clinical trials. Troriluzole is only one of them. Arguably, investors attribute greater value and attention on rimegepant and vazegepant for migraine. In December, Biohaven boasted positive phase 2/3 clinical trial results with vazegepant, making it the first and potentially only inhaled acute migraine treatment. It functions by a known molecular mechanism, but the unique delivery makes its effect on migraine pain felt in as quickly as 15 minutes.

Importantly, Biohaven filed for approval with the Food and Drug Administration (FDA) last year for its migraine treatment vazegepant. The Prescription Drug User Fee Act (PDUFA) deadline for the FDA to decide will happen this quarter.

Gaining momentum

Today also marked another announcement by Biohaven. The market research and analytics firm Cortellis named Biohaven's migraine drug vazegepant to its 2020 list of "Drugs To Watch." The list includes 11 drugs that Cortellis believes will meet or exceed $1 billion in sales by 2024. Do others believe this? It appears so. Institutional investors ponied up $250 million to finance the company at the end of January. These funds will carry Biohaven through the approval process and the initial commercial launch of the drug.

Investors buying stock following the troriluzole failure can get shares for around $47, a discount from the $51.75 per share paid in January's financing. With a first-quarter PDUFA date, the FDA's decision on vazegepant's approval will make for a binary event. Risk tolerant investors could see dramatic upside if approved. Data from several successful phase 3 clinical trials evaluating the drug in migraine patients support the submission for approval.

Investing in biotech can be tumultuous, so risk tolerance becomes paramount. Less meaningful drugs in a company's pipeline, like troriluzole, can easily cause the stock to jump 10% or more on news. Results on marquee drugs can amplify the stock's reaction. Biohaven stumbled in the first indication with troriluzole, but most investors place their emphasis on the migraine drugs. Enjoy the discount to accumulate shares before the FDA weighs in with its approval. A positive decision could send Biohaven's stock soaring.