Biotechnology company IntraBiotics' (NASDAQ:IBPI) stock plunged more than 70% this morning after it stopped clinical trials of its key drug candidate, Iseganan. The drug, which is being developed to prevent Ventilator Associated Pneumonia (VAP), is being shelved after an independent committee noted higher rates of both VAP and mortality among the trial's active treatment group as compared to the control placebo group.
That's not very good. IntraBiotics' CEO Henry Fuchs called the outcome "unexpected," adding that they had considered Iseganan safe based upon previous studies.
This is a brutal outcome for IntraBiotics and its shareholders, but it's also a real risk of investing in one-trick-pony companies. IntraBiotics should most likely trade near the value of its cash, since it has no other real clinical candidates in its pipeline and no revenues. You see them most often in biotechnology -- companies with a single promising but unproven technology.
ImClone (NASDAQ:IMCL) was just such a company. Had Erbitux been rejected, the company's shares would have been crushed. Junior mining and exploration companies are similar -- they either have a gusher or a mother lode or they have bupkiss. These are binary situations, and they are extraordinarily high risk in nature.
In fact, the IntraBiotics trials remind me of the famous paradox of the cat in the box, proposed by Ervin Schroedinger to Albert Einstein. A live cat is placed in a box with a radioactive atom. If the atom decays, the cat dies. If it doesn't, the cat will survive. The moment before the box is opened to reveal the cat, though, the cat is simultaneously alive and dead. Once the box is opened, the cat's condition is revealed, but it can only be one or the other. The act of observing disturbs the observed.
What IntraBiotics and its ilk represent for investors is nearly straight binary outcomes. Black or white. One or zero. Alive or dead. The trial or the exploration or the drilling is conducted in a black box, and the outcome, one way or the other, is nearly guaranteed to have a substantial impact.
Einstein's response, of course, was that God doesn't play dice with the universe. Investors who hold such kinds of equities, though, have to know that they are in fact playing dice with their portfolios. You can't go back at this point and sell IntraBiotics pre-outcome, nor could you go back and buy ImClone pre-approval. This is not to say that these situations should be avoided, but they ought to be recognized for what they are in advance.
IntraBiotics' cat is dead. It may be a while before it gets its hands on another one.
Bill Mann owns one Schroedinger's cat. He holds none of the companies mentioned in this article.
