What a rough start to the week for biotech investors. There aren't a lot of winners out there Monday, but there's some remarkable carnage. Let's take a closer look at some of the bloodbath's headliners and see what this all means for investors.
Let's start with the elephant in the room, Peregrine (NASDAQ:PPHM), which had one of the worst single-day plunges since I began covering health care. In fact, "plunge" isn't a strong enough word when a stock loses 78% of its value in one day. This was akin to getting kicked into a bottomless pit, a la the opening scene of 300.
What caused the single-session meltdown? It turns out that even risk-loving biotech investors hate uncertainty, and when Peregrine issued a press release saying not to trust the Phase 2 clinical trial results for its lead drug candidate, bavituximab, shares were clobbered. Apparently, a third party calculating results for bavituximab in non-small-cell lung cancer incorrectly coded which patients received the drug or placebo, vindicating skeptics who raised concerns over the drug's dramatic 6.5-month overall survival benefit.
The run-up on eye-popping data, followed by a collapse when it turned out too good to be true, was reminiscent of Vertex Pharmaceuticals' (NASDAQ:VRTX) Phase 2 VX-809 trial treating cystic fibrosis. When the treatment was combined with Kalydeco, nearly half of patients saw 5% improvement in lung function -- or at least that's what investors thought when they bid up shares 55% in a single day. It turns out those results were overstated, and only 35% of patients saw improvement, but the fall-out was only a 10% decline.
Now Peregrine insists that the error will not affect other trials in progress, and it's easy to make an argument that Monday's sell-off is overdone. Unfortunately, Peregrine didn't release new results like Vertex, and with no approved drugs, it does not receive the same benefit of the doubt. Without any clarity, I would only be comfortable making a pick in CAPS or sitting safely on the sidelines.
The craziest part of the Peregrine debacle is that it knocked the continuing drama at Questcor (NASDAQ:QCOR) off page one. Readers will remember that on Wednesday, shares were sliced in half on news that insurer Aetna would no longer reimburse Achthar for use in anything except infant spasms. Shares rallied 15% after Questcor management's conference call suggested that the policy bulletin was misconstrued and that it was still business as usual. Wall Street agreed, keeping price targets near double where the shares sat. Meanwhile, short-selling blog Citron Research believed that this was merely the first domino to fall.
This brings us to yesterday's 37% evisceration. This wasn't reimbursement-related; other major insurers didn't follow Aetna's lead. It was possibly worse. The FDA is probing the company's marketing practices, which Citron Research had highlighted as a red flag in a July post.
I agree with fellow Fool Sean Williams: Investors shouldn't get suckered in by the temptingly low P/E or Wall Street's growth rates, which they can revise down suddenly. This stock looks like a classic stay-away to me, with too much chance of violating Buffett's first rule: Never lose money.
Finally, this brings us to two of biotech's hottest stocks: obesity-drug makers Vivus (NASDAQ:VVUS) and Arena Pharmaceuticals (NASDAQ:ARNA). Shares of Vivus tumbled more than 10% on Friday after the company issued a press release saying the company did not expect Qsymia to receive European approval. Wall Street still believes it will get over the EU's higher bar, but it could take another clinical trial, pushing approval off until 2015. Shares dropped an additional 9% yesterday.
Arena was down 7%, erasing Friday's gain following Vivus' misfortune. At an obesity conference there was mixed opinion from analysts over how fast doctors would prescribe the new drugs. Doctors believe Qsymia works better than Arena's Belviq, but Belviq's cleaner side-effect profile may help give it the nod.
Both stocks have already gone on a huge run over the past year, but if you believe in the long-term potential of obesity treatments, buying both after near-40% pullbacks from their 52-week highs sets you up to win no matter which company wears the sales crown.
But if you are looking to take sides, try The Motley Fool's new premium report on Arena Pharmaceuticals. This report outlines key opportunities and risks facing the company, plus the must-watch areas for investors. Click here to receive your copy, complete with a year of updates!
David Williamson holds no position in any company mentioned. Click here to see his holdings and a short bio. Follow him on Twitter. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.