Valentis Plunges 80% and Analyst Says "Hold" (VLTS)

Investopedia Advisor submits: Well, easy come, easy go. At least, that’s what they say in Las Vegas, Atlantic City and, um, on Wall Street? Shareholders of Valentis Inc. (VLTS) surely became reacquainted with the phrase on Tuesday, when they saw the company’s share price instantly vaporize 80% of its value at the market’s open.

The Burlingame, California-based company’s future was cut short Tuesday morning after the Food and Drug Administration [FDA] announced the firm’s flagship drug failed phase two testing. The Valentis drug, named VLTS 934, was intended to be a treatment for peripheral arterial disease [PAD] but produced no statistically significant differences over the effects of a placebo pill.

Now, to be fair, this sort of failure is seen every now and then in the biotechnology sector. In the quest for scientific advancement, failures such as this will inevitably occur again and again.

However, theirs is not the only failure to come out of this FDA announcement. There is another, much more glaring failure which has occurred – a failure of the investment companies who provided research coverage for the stock.

If you dig past the current week’s worth of news headlines for VLTS, you will find some older news that was just a little bit more bullish. Actually, let me rephrase that – a lot more bullish. There were four separate brokerage firms who issued either a buy or strong buy rating for the company in the months leading up to Tuesday’s collapse. As recent as ten trading days before the collapse, one particular investment firm decided to initiate coverage on the stock with a buy rating.

But the story gets even better. After VLTS had shed 80% of its share price (it gapped down), the same investment firm decided to lower its rating for the stock from buy to hold. Presumably, this means that they thought the company was not in rough enough shape to warrant a sell rating.

This is a little hard to swallow, considering that during the very same day, Valentis’ CEO Benjamin McGraw saw fit to issue a press release stating that, “The company has no plans for further development of the product and is assessing strategic opportunities, which include the sale or merger of the business, the sale of certain assets or other actions.”

Just how bad does it have to get for a sell rating to be issued?

The only argument I can think of for a hold rating is that the liquidation value of this firm might salvage something. Perhaps the analyst behind the hold has some sort of insight in this area?

Now just to be clear, I’m not picking on this particular investment bank and its analysts for their apparent gaff of issuing the buy rating. As I mentioned earlier, there were three other investment firms that published research reports on VLTS during April and May, and all three of them issued either buys or strong buys for the stock, with price targets ranging anywhere from $6.50 per share to upwards of $14 per share. (You also have to give them slack for simply being unlucky.)

My point is the absurdity of the situation where a company gaps down 80% but is still a "hold". Everybody knows that Wall St. doesn’t issue sell ratings, but this situation is simply hilarious. Well, it’s hilarious as long as you didn’t own VLTS.

I could be wrong in the long run on the hold rating, but so far things are looking just as bad for Valentis – it was down another 15% today.

By Chris Gallant, Contributor - Investopedia Advisor

Chris Gallant is an analyst and contributor for the Investopedia Advisor. Chris graduated from the University of Alberta School of Business with a major in finance. Prior to joining Investopedia, Chris spent time working with the Alberta Ministry of Finance, taught Business classes at the undergraduate level and helped manage a charitable equity fund for the University of Alberta.

Disclosure: At the time of release Chris Gallant did not own any shares in the companies mentioned in this article.

Comments

[David Harper:]

Chris - Thanks for this. This also shows the problem of simple "buy" or "strong buy." Apparently, this was sort of a binary real option, worth $x if passes FDA trial, worth about 0 if not. So the purchase is a portfolio issue (is the high risk option suitable for my portfolio) or at least a bit more complicated than simply "buy it." But thanks for highlighting this, this is my gripe with sell side, too. They give you after-the-fact "gee thanks" help because they are so obsessed on near term guidance

2006 Jul 13 02:38 PM