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Maybe I was too harsh on Brian Hunter last week. This morning, I was greeted with a jolt of my own. One of my positions was down 80% in a single day. Fortunately for me, this isn’t the prelude to a death spiral. There’s no margin call to be answered. Such is the power of diversifying risk, especially when the underlying investments are as risky as development stage biotech.

Nuvelo (NUVO) is down over 80% today to around $3.90, after it announced that two separate trials involving its lead compound, alfimeprase, failed to meet their primary endpoints. Nuvelo and its partner Bayer also suspended enrollment in two additional ongoing trials while they “examine the data.” While the company has not yet fully conceded that this product is dead, investors are treating it as such, and past experience shows they are probably right.

After today’s move, the company is valued at not much more than cash on hand. With a market cap of $200 million and $150 million in cash, the market has taken a rather dim view of the company’s prospects. The company has two other drugs in the clinic and at least one other candidate poised to progress to the clinic.

All indications are that management did all the right things. Earlier clinical results were sufficient to land a large partnership with Bayer. Trial design seemed to be meticulous. Though results in one of the two trials rose to the level of statistical significance, they were not good enough to meet FDA standards for approval. The company has hypothesized that catheter placement has a greater effect on blood flow than was anticipated and resulted in the drug being flushed away from the clot relatively quickly.

Whatever the problem, the events highlight the risks of investing in these stocks. There is no such thing as a “slam dunk” in developing drugs. I was fortunate enough to buy NUVO at $1.95 and sell some above $16, but it’s still painful to watch anything go down 80% in one day. At this point, much of the event risk has been eliminated, and I’ll continue to hold NUVO. In fact, if it drifts down further towards its cash level, I’ll add it to my basket of biotech (which reminds me, I really need to write up the rest of the basket). Most importantly, it’s a sobering reminder: as these stocks shoot upward, sell some. Mornings like this underscore that point all too clearly.

NUVO 1-year chart:

Disclosure: Neal Shanske holds a position in NUVO

Source: Nuvelo Plummets Over 80% After Drug Trials Fail