Benjamin Graham and Warren Buffett may urge investors to buy when there's blood on the streets, but even the best advice has its limitations. In the case of Bluebird Bio (BLUE 1.13%) stock, there's plenty of blood, but this one belongs in the "cheap for a reason" category.
Granted, it may seem overly cautious to shy away Bluebird Bio stock when it's already down substantially in December, and soon after the company garnered a regulatory approval. Nonetheless, eager investors should consider why Bluebird's stock price crashed nearly 50% not just once, but twice within the past month.
The first crash: Clobbered by two competitors
Earlier this month, Bluebird Bio's shareholders probably felt like winners as the stock had rallied from $3 in mid-November to nearly $5 for a hot minute. Then came a regulatory clearance for Bluebird Bio, which would typically spark a relief rally in the wild world of biotech stocks.
Yet this situation was anything but typical. Bluebird Bio stock dropped nearly 50% even though the Food and Drug Administration (FDA) had just approved the company's gene therapy, known as Lyfgenia, to treat selected patients with sickle cell disease (SCD).
That certainly sounds like great news for Bluebird Bio, but it's not the full story. The FDA also approved Casgevy, a competing gene therapy for SCD patients co-developed by CRISPR Therapeutics and Vertex Pharmaceuticals.
This wasn't just bad news because Bluebird Bio would have to share the proverbial pie in the SCD therapy market. Unfortunately, while Lyfgenia resolved severe vaso-occlusive events in 30 out of 32 studied patients, Bluebird Bio acknowledged that hematologic malignancy (blood cancer) "has occurred in patients treated with" Lyfgenia.
Casgevy, in contrast, indicates no such blood cancer warning. The market evidently concurred with RBC Capital Markets analyst Luca Issi, who warned of an "uphill commercial battle" for Bluebird Bio against CRISPR Therapeutics and Vertex Pharmaceuticals.
The second crash: More shares, more problems
After such a horrendous share-price decline, some financial traders may have assumed that the worst was over for Bluebird Bio stock. After all, what are the chances of two near-50% crashes happening to the same stock in the same month?
The chances are low, but not zero. Bluebird Bio stock tumbled 46% on Dec. 20 even after having already lost nearly half of its value a couple of weeks earlier. That's because on the night of Dec. 19, Bluebird Bio disclosed a public offering of 83,333,333 common shares at $1.50 apiece. Moreover, Bluebird Bio will offer underwriters a 30-day option to buy up 12,499,999 more shares at the current public per-share offering price.
Leerink Partners analyst Mani Foroohar saw this as "the necessary action" for the company "to alleviate near-term balance sheet pressure," and Bluebird Bio expects to generate $125 million in gross proceeds, before certain deductions are factored in, from the public offering.
However, the market evidently wasn't receptive to the positive spin, with the prospect of share value dilution being unpalatable to Bluebird Bio's current stockholders.
Cheap stocks can always get cheaper
Once a company goes down the road of large-scale stock offerings and dilution, it's difficult to regain the stockholders' trust. Indeed, Bluebird Bio's shareholders have every right to wonder whether the company might enact another public offering in 2024.
That concern, along with competition from CRISPR Therapeutics and Vertex Pharmaceuticals, should prompt prospective investors to think twice about buying Bluebird Bio stock now. Sure, the stock might look cheap on the chart, but it also looked cheap after the first of two recent crashes.
So, take a lesson or two about the volatile proclivities of biotech stocks, and about the possibility that any non-zero-priced stock, even after a jaw-dropping drawdown, can always go lower.
