One of the reason why I don't like to speculate with overinflated biotech stocks, is that once something goes wrong, loses are of biblical proportions. Such is the case of Ariad Pharmaceuticals (ARIA) recently.
click to enlarge)The stock has lost about 85% of its value over the past couple of weeks. The tumble started when the company disclosed increased adverse blood-clotting events in patients taking its FDA-approved blood cancer drug Iclusig in a 24-month follow-up. Then Ariad announced it is discontinuing the Epic trial for patients, recently diagnosed with chronic myeloid leukemia, and the stock tumbled another 40% last Friday.
Irrespective of the company's misfortunes, investors had bid the company's stock way too high, and as far as I'm concerned, even with no bad news, investors would not have made any money buying the company's stock at the $22 mark. There were way too many expectations build into the stock already.
At $22 a share, the company had a market cap of around $3.8 billion. That's way too much value for a company losing money with little or no sales and just the promise it might break even at some point in the future.
However the question today is, is the company salvageable and should investor buy the dip?
As you can see from the chart above, the company's balance sheet is still under control and the company still has about $300 million in working capital. However at the same time the company has lost about $250 million over the last twelve months, and today it is losing about $65 million per quarter. So the company has enough money for about 5-6 quarters left.
However, the only reason the company has the working capital it has, is because it has been able to sell shares at very high prices over the years. Given however the stock's current tumble, if the company has to sell shares in order to survive over the next year or so, dilution at current levels will be massive for current shareholders. So that's something to keep in mind from now on.
The company still has several drugs in the pipeline, so one really knows if it will come back from the dead before it runs out of cash. However the company's valuation has also come down a lot. Irrespective if you bet on the company's pipeline of products or not, the company's current market cap is buyable, based on the company's balance sheet. At the $22 mark it was not even without the bad news.
However by the term "buyable", I only mean high risk speculative players and not long term investors. Unless investors receive more clarity from the company as per its pipeline of products, long term investors should not own this stock.