With great reward, comes great risk, and vice-versa, especially in the biotech/small pharma sector.
For months Keryx Biopharmaceuticals (NASDAQ:KERX) was drawing increased investor attention, and as is usually the case in this sector, much of it was speculative attention based on pending results from a Phase III trial for Perifisone, which Keryx in-licensed from Aeterna Zentaris (NASDAQ:AEZS) as a potential first-in-class oral anti-cancer drug.
The rewards came along with all the attention.
After trading for right around a buck during the Phase II trials for Perifisone, and Keryx's other late stage product candidate, Zerenex, shares quickly spiked as the company reached the Phase III stages of development and ultimately spiked to well over six dollars in 2010 before setting a high of over $5.50 during the most recent 52 week period.
Shares had since retreated, but spiked again as some high-profile blogging earlier this year had the company back in the headlines with debates as to whether the trial would be successful or not. While it's routine to expect a runup in the share price of a company before a significant catalyst such as Phase III trial results is due, it's also routine for many investors to take advantage of such spikes and sell some trading shares into any run in order to ensure banking profits in case the catalyst does not turn out in favor of the longs.
We often suggests that it's a wise strategy to do just that.
In fact, in the case of Keryx, red flags became even more apparent when the headlines were no longer about the "meat and potatoes" of the company, as I mentioned a few weeks ago, and became more about the personalities commenting on the company.
Having already banked significant gains during the most recent runup, KERX had offered investors a chance to bank some profit before the big news hit the wires.
Of course hindsight is 20/20, as they say, and it's easy for investors to say now that the previous spike was a good time to sell, but that's why in this volatile sector, one has to have a happy trigger finger no matter how promising a story looks. It's worse, in my opinion, to not have sold at least a few shares to bank some profit into a run than it is to hold it all only to watch a stock drop significantly - and with it the chances of ever banking the profit again.
I mentioned earlier this week that I've tried both strategies in my day, so I'm speaking from personal experience with that one.
As it turns out, Keryx announced the Perifisone results early Monday morning - and they weren't good.
Shares plunged by over 60% on monumental volume, indicating that there's not many sticking around to wait on Zerenex results. Phase III results from a trial testing Zerenex as a treatment for end stage renal disease (ESRD) patients with hyperphosphatemia are due in the fourth quarter of this year, but Zerenex does not have near the market potential as had Perifisone, another reason why investors have decides to bail in droves on Monday.
It's always a disappointment to see drugs fail - although many popular bloggers tend to enjoy seeing drugs fail - as patients gain hope and Doctors put faith in developing potentially life-altering treatments for the benefit of mankind, but the Keryx story is also a stark reminder of the inherent risk associated with playing around in this sector.
At the end of the day, there's a fine balance between taking part in the advancement of medicine and protecting your investment, and that's why it's always been my opinion that it's best to play the speculative spikes in order to at least be on house money - if not already ahead of the game - by the time the big news comes out.
Although Keryx is not a one-trick pony and has a backup plan - as well as some money in the bank - as I mentioned above, the market potential for Zerenex is not as significant as it was for Perifisone. The mass exodus on Monday also indicates that the one could drop further before it's all said and done. KERX gave it a fine go with Perifisone and the stock has provided more than its share of opportune buys and sells over the past few years, but I think this one needs a breather.
Disclosure: No position.