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Keyrx (KERX) recently suffered a major setback after the news of the Phase III clinical trial of its anti-cancer drug KRX-0401(perifosine) failed to have any real effect in terms of significantly lengthening the life expectancy of those with colorectal cancer.

Approximately 468 colorectal cancer patients participated in the study, but the company reports that the drug didn't yield the results it wanted. Patients were given a drug containing perifosine, a molecule developed by Canadian drug manufacturer AEterna Zentaris (AEZS), (Keyrx retains North American rights to use the molecule) combined with Xeloda (manufactured by Roche). For basis of comparison, some patients received a placebo combined with Xeloda instead.

Since news of the clinical trial failure, stock prices for both Keryx and AEterna Zentaris have dropped. It seems that investors are skittish about investing in Keryx and have invested their money elsewhere. Another clinical trial involving perifosine for the treatment of multiple myeloma may be put on hold until Keryx figures out its next move.

Against a backdrop of a now-failed perifosine, Keryx has little going for it. Investors place a very modest price tag on shares, and the current share price implies that Keryx' other drugs are likely to fail, too. Fortunately, Keryx has another key drug in its pipeline, Zerenex, developed to lower hyperphosphatemia (elevated phosphate levels) in patients with renal disease. This drug is also undergoing Phase III clinical trials. The company has already secured an Special Protocol Agreement (SPA) from the FDA. An SPA helps move the approval process through a little faster.

For many analysts, the latest clinical trials for Perifosine, aimed at allowing Akt activation in the phosphoinositide 3-kinase (PI3K) pathway, which could potentially stop cancer from spreading throughout the body, didn't seem very promising.

In a perfect world, clinical trials would never fail - but unfortunately, they do - and on a regular basis. Even the largest pharmaceutical company in the world Pfizer (PFE) has reported clinical trial failures from time to time. In late 2011, for example, the company announced that a trial involving a combination of two antifungal drugs, Vfend and Eraxix, had little effect on the treatment of fungal infections in the body. Initially, stocks fell after the announcement, but the company has since rebounded and is one to watch in 2012.

Sometimes it's not just clinical trials that can have an effect on a company's stock. Recently, for example, MAP Pharmaceuticals (MAPP) stock fell after the FDA rejected its migraine-fighting medication, Levadex. The reason for the rejection was concern over the manufacturing process of inhalers used to deliver the medication to patients. This is a minor reason for rejection, but sometimes, even small mistakes can cause a company a lot of money in future sales and investments.

But even after a company receives FDA approval, its stock can drop. This is exactly what's been happening to Affymax (AFFY) when its drug, Omontys (peginesatide), used to treat anemia, recently hit the market. It seems investors want to take a little time to see how well the drug performs against its main competition, Amgen (AMGN), which released its own anemia drug treatment, Epogen.

So what does all this mean to investors? A lot in terms of whether to hold onto a stock or dump it in favor of something a little more stable. Investors of biotech and pharmaceutical stock are used to the highs and lows (as well as the very highs and very lows), so none of the above examples should shock anyone. But for those who want to hone their ability to gauge when it's time to drop a stock, it's important to understand how clinical trials (and their outcomes) can affect the value of a company's stock. In addition to that, it's important to then review the company's entire pipeline, past performance and how well funded it is to determine how quickly it will bounce back.

In Pfizer's case, a failed clinical trial is not enough to have a lasting impact on an internationally recognized company with more than adequate cash flow. But for smaller companies like Keryx, clinical trial failure could have a lasting impact on its bottom line for a much longer amount of time. For investors, the decision is whether or not to stick with the company and ride out the low or get out now and find a more solid investment opportunity. Given that Keryx only has very few new products in its pipeline, getting out now might not be a bad idea, especially when there are other more profitable opportunities on the horizon.

After digesting the facts surrounding the failure or success of a clinical trial, investors still have to deal with the reality that just because a trial is successful doesn't automatically mean they're involved in a sound investment opportunity. FDA approval or rejection plays a large role in the moves investors make going forward. Map Pharmaceuticals suffered a loss after its drug failed to meet all FDA approval standards - as a result, the stock price fell. The same happened to Affymax - but its drug was approved by the FDA. And while it's safe to say that most stocks drop after receiving a rejection, in some rare cases, stocks will drop after an approval.

Before dumping an under-performing stock, it's best to sit back for a moment and pause to consider the entire situation. Sometimes what a company does next, whether it moves ahead quickly with additional trials for other products, makes significant improvements on products that failed in clinical trials, works with the FDA to meet approval standards, or makes radical changes in its marketing strategy to increase sales of products currently on the market, can result in a stock increase. Being open to the idea of waiting to see what happens next may mean the difference between recouping monies lost when a stock dropped and seeing a return (even if it's smaller than expected) when the stock rebounds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Keryx: Next Shot Is Zerenex