When Binary Events Become Biotech Bloodbaths

Before you go, we thought you'd like these...
Before you go close icon

Biotech investors live for the binary event, when a single piece of news -- be it a trial result or an FDA decision -- can instantly double an investment. Take buyout candidate Theravance (NAS: THRX) , which recently popped 20% on news that GlaxoSmithKline (NYS: GSK) upped its stake in the small biotech to 27%.

But with the possibility of sudden riches comes big risks -- risks that new investors drawn to seemingly easy gains sometimes fail to grasp. Consider these three biotech bloodbaths from just this week a convenient reminder.

First up is the less-than-dynamic duo of Keryx Biopharmaceuticals (NAS: KERX) and AEterna Zentaris (NAS: AEZS) . Hopes were sky high that lead drug candidate perifosine would ace a phase 3 trial dubbed X-PECT focusing on a subset of the phase 2 trial's most receptive patients. I'm guessing investors in either biotech didn't X-PECT a 65% share-price drop, but that's what happened when perfosine couldn't meet its goal.


Perifosine's failure treating colorectal cancer hasn't doomed the drug to the waste bin -- yet. But the drug's phase 3 trial for multiple myeloma is in jeopardy as the management "carefully evaluates" it, citing recruitment difficulty. There was no word yet about its phase 2 trials treating several other cancers.

AVI BioPharma (NAS: AVII) , which saw a near 30% decline in its shares, is a slightly different animal. Its muscular dystrophy drug etepliersen worked at a biological level by increasing dystrophin-containing muscle fibers, but not where it mattered: helping patients walk. With AVI's expensive phase 3 trial on the horizon, only $40 million in the bank, and cash burn approaching $35 million over the past 12 months, investors sticking with this stock can probably look forward to dilution.

For investors holding on to an investment suddenly worth significantly less, there is a glimmer of hope. As usual, when a trial goes poorly, biotechs tend to focus on the positives. Both Keryx and AEterna touted other drugs in their pipelines. For Keryx, it's Zerenex in phase 3 trials, and for AEterna, its more robust pipeline includes AEZS-130 and AEZS 108 in phase 3 and phase 2 development. AVI management, gearing up for a phase 3 trial, is optimistic that over a longer regimen patients could see tangible results.

However, these companies live off hope, so don't just look at the sell-off and assume shares are cheap. Do your homework, understand the risks involved, and have a firm grasp on what you can afford to lose, if a binary event turns into a biotech bloodbath.

A better approach
Motley Fool co-founder David Gardner recently identified a small-cap health-care company that is poised for monster returns, without worrying about trial failures. To uncover this top pick today, take a look at our special free report, "Discover the Next Rule-Breaking Multibagger." Don't miss out on this limited-time offer and your opportunity to discover this game-changing company before the market does. Access your report -- it's totally free.

At the time this article was published David Williamsonholds no position in any company mentioned. Check out hisholdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of GlaxoSmithKline. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners