Halloween Burning Money

Source: Flickr user Mike Poresky

Goblins came to Wall Street early this year when markets flirted with a crash in the beginning of October. As a result, a frightening dip in account values may have many investors tossing and turning at night worrying over monsters lurking in their portfolio. So I dug up three stocks with frightening risks that may pose more trick than treat to investors.

The headless horseman
The drop in
Dendreon's (NASDAQ:DNDN) shares in the past year has been fearsome, leaving some to wonder if a big drugmaker will show up and buy the company on-the-cheap to grab Provenge, Dendreon's impressive prostate cancer drug. However, those hopes may fizzle given that Dendreon's C-Suite remains in flux following the departure of its CEO this past summer and Provenge is facing stiffening competition from a slate of competitors including Johnson & Johnson (NYSE:JNJ), which markets the top selling blockbuster Zytiga, and Medivation (NASDAQ:MDVN) and Astellas (NASDAQOTH:ALPMY), the two-some behind the fast-growing drug Xtandi.

Despite recent improvements, Provenge's sales remain millions of dollars below their quarterly peak of $86 million in 2012 and quarterly losses continue to mount despite deep cuts to cost. The absence of leadership and potential for market share losses are good reasons to avoid Dendreon; especially given that the company's cash hoard slumped by 25% to $66 million between the first and the second quarter and its long term debt eclipses an eye-popping $573 million (according to S&P Capital IQ). Although Provenge is an intriguing drug, mismanagement has plagued Dendreon and that suggests that shares may be too hair-raising to justify the risks.

Bear With Sickle

Source: Flickr user Mark Rain

Monstrous undertaking
MannKind's
(NASDAQ:MNKD) Afrezza traveled a troubled path to FDA approval this past June. As a result, delays resulted in mounting costs that loaded MannKind's balance sheet with debt and forced MannKind to dilute shareholders to the point where hundreds of millions of shares will require hundreds of millions of dollars of sales success to justify the company's current market cap of $2.3 billion.

In August, Sanofi (NYSE:SNY) threw MannKind a necessary lifeline when the diabetes powerhouse partnered with it on Afrezza, handing over $150 million upfront and agreeing to put the full power of its marketing might to work. But even with Sanofi's help, there's no guarantee that Afrezza will be a commercial success, and if it is, Sanofi will get to keep 65% of every Afrezza sale for itself. That means that Afrezza would likely need to become a multibillion dollar a year blockbuster drug to justify MannKind's share price, and frankly, to me that's a blood-curdling risk.

Casting spells
GW Pharmaceuticals
(NASDAQ:GWPH) has bewitched investors this year with a spell-binding, but possibly over-hyped medical marijuana drug pipeline. Admittedly, GW Pharma already has one marijuana based drug, Sativex, on the market in Europe and the company hopes to win FDA approval for Sativex's use to treat cancer pain soon. But Sativex, which is approved in 26 European countries to treat multiple sclerosis spasticity, is far from a commercial success. In its most recent quarter, GW Pharma reported that Sativex sales totaled just $2.1 million.

Since GW Pharma diluted investors with a 1.4 million share follow-on offering in June (when shares were trading at $86.83) and the company's market cap has soared to $1.3 billion this year, Sativex sales would need to jump substantially to justify investors' fascination.

If not, then investors will need to hope for an FDA approval of Sativex in cancer pain, or eventual approval of GW Pharma's other cannibinoid drug, Epidiolex, for use in certain epilepsy patients. However, a cancer pain approval would be for second line use only behind opioids and the two epilepsy conditions GW Pharma is studying, Dravet and Lennox-Gastaut Syndrome are rare with small patient populations. And if those obstacles aren't frightening enough, GW Pharma may also have to elbow for share against competing marijuana based drugs being developed by Insys Therapeutics (NASDAQ:INSY) for those indications, too. Given those challenges, the risk to GW Pharma's share price isn't all that enthralling.

Sleeping soundly
All three of these companies are frighteningly unproven. At Dendreon, management pitfalls have created a crisis of confidence that may prove insurmountable given its debt load; MannKind's balance sheet remains questionable and its potential revenue from Afrezza significantly diluted following its deal with Sanofi; and while GW Pharma has plenty of cash on its books following its offering, it has yet to prove that there's enough commercial demand for its marijuana based drugs to justify its price. Those are daunting obstacles that make me more than happy to cast them out and bar them from my portfolio.

Todd Campbell owns shares of Medivation. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.