With its shares plummeting 18% on March 30 and 40% over the past month, it shouldn't be too surprising to hear that investors are skeptical about the future of Avidity Biosciences (RNA 2.22%).
But biotechs don't behave like typical growth stocks, and they can have more staying power than what their stock prices might suggest. Let's analyze why the market dumped Avidity and whether people who invest in it now could profit down the line.
What went wrong
Understanding why Avidity's stock tanked requires a quick trip down memory lane to late last year.
In September of 2022, its clinical trial investigating its AOC 1001 candidate to treat myotonic dystrophy type 1 (DM1), a rare muscular disease, was placed on a partial hold by the Food and Drug Administration (FDA) after one of the patients experienced a serious adverse event. Under that hold, the company couldn't recruit any new patients to the trial although existing patients were allowed to continue with their scheduled dosing. But the company didn't disclose what the serious side effects were, only that a patient had experienced them.
At the end of March, the biotech provided an update wherein it stated that the patient had suffered a stroke, localized in the thalamus in their brain. Strokes in the thalamus only account for between 3% to 4% of all strokes. But the stroke the patient had was special. It affected anatomical structures in both sides of the thalamus at once rather than just one side, making it even rarer. And to investigators running the clinical trial as well as the FDA, that detail made the adverse event too unusual to chalk up to random chance rather than the treatment with AOC 1001.
The market's response to the news appears to strongly support regulators' take on the issue. After an initial investigation, Avidity says it can't figure out how treatment with AOC 1001 could have caused the stroke. The company plans to give an extensive interim update on the program before the end of the year. But on April 27 it's going to give a briefer update on safety and efficacy data at the annual meeting of the American Academy of Neurology (AAN). When it does, expect the stock to move one way or the other.
This one's still salvageable
There are a couple of reasons to believe that Avidity Biosciences will survive to compete for another day even if it reports more bad news about AOC 1001 at the end of April or at the end of 2023.
First, it has a total of three clinical-stage programs in its pipeline, all of which are in phase 1/2. It's developing medicines to treat Duchenne muscular dystrophy (DMD) and facioscapulohumeral muscular dystrophy (FSHD), another pair of rare muscle diseases. Even if AOC 1001 gets shut down by regulators or if it can't recruit the remainder of its study cohort -- and neither is likely given what we know as of right now -- it still has two other programs that it'll be working to advance.
That doesn't mean you should buy this biotech stock if it ends up going down more, just that on a long enough timeline it'll have at least two more chances to succeed with one of its therapies.
On that note, the company also has about $611 million in cash and equivalents, which is an ample amount for its needs at the moment. With total expenses for 2022 coming in at $188 million, it still has at least three years to get a product out the door before it's in danger of running out of money. And since its debt is a scant $10.7 million, it has plenty of room to borrow if it needs a bit more time to get its programs ready.
So Avidity isn't done for just yet. But even if you're a risk-tolerant biotech growth stock investor, you should probably avoid buying shares of the company until it provides a bit more information about its lead program at the end of the month. It's always possible that the market overreacted or didn't completely understand what went wrong in the clinical trial, but it's also entirely possible that the company is going to face real difficulties convincing regulators that its medicines are safe moving forward, so it's better to sit on the fence until this is all clearer.