What happened

Shares of CymaBay Therapeutics (NASDAQ:CBAY) jumped 109% last month, according to data from S&P Global Market Intelligence. The stock popped when the company reported first-quarter 2020 operating results, which were headlined by an important update on the company's lead drug candidate, seladelpar. 

Development of the experimental therapy was halted in late 2019, when researchers found evidence it might have led to liver damage in a clinical trial for primary biliary cholangitis (PBC). CymaBay Therapeutics also decided to halt development of the drug candidate in nonalcoholic steatohepatitis (NASH). 

But upon additional review of data from the halted phase 2b study in NASH, an independent panel of researchers found no evidence seladelpar induces liver damage in those patients. CymaBay Therapeutics announced in mid-May it intended to resume development of the drug candidate in NASH, which sent the small-cap stock soaring.

A businessman riding a cartoon rocketship.

Image source: Getty Images.

So what

Recent events are encouraging, but there's a catch: CymaBay Therapeutics can't resume development of seladelpar in NASH without the support of the U.S. Food and Drug Administration (FDA). 

The company claims an "independent expert panel unanimously concluded there is no clinical, biochemical, or histological evidence" that the drug candidate damages the liver of NASH patients. The panel also unanimously supported resuming development of seladelpar, which could help to persuade regulators. But investors should remain cautiously optimistic at best until the FDA officially allows the clinical trial to proceed.

Now what

CymaBay Therapeutics is a $300 million company with only three pipeline assets, which includes the halted development of seladelpar and a preclinical asset. That doesn't provide a comfortable level of risk diversification for investors. While the development-stage business ended March with $176 million in cash, the risk-reward profile doesn't appear to favor investors at this time. 

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.