Today’s late-stage pharmaceutical companies remind me of the old oil wildcatters from the 1920s. They spend a ton of money hyping a study, as wildcatters would a prospect. Then investors wait breathlessly to see if they have a gusher or a dry hole.
Acasti Pharma (NASDAQ:ACST) seems to have found nothing but a dry hole with its CaPre drug, designed to treat high triglycerides.
It’s not that patients taking CaPre saw less of the blood fat implicated in heart disease and stroke. But people who just thought they were getting the drug, and got cornstarch instead, did almost as well, according to the company.
The company’s official release came out Jan. 13, one trading day after shares closed at $2.18. They opened for trade Jan. 23 at 72 cents.
We Have a Winner
Acasti isn’t the only recent loser in this space. AstraZeneca (NYSE:AZN) recently walked away from its Epanova, a similar drug, taking a $100 million write-off.
Fortunately for those of us with high triglyceride scores, we do have a winner in this space. It’s Amarin (NASDAQ:AMRN), which I wrote about skeptically at the end of last year. Amarin opened for trade Jan. 23 at $20.76, a market capitalization of about $7.5 billion. Acasti is worth $61 million.
Yet Acasti did rise nearly 4% on Jan. 22. Results from a second study of CaPre are due to be compiled next month. If those numbers look better, it could still seek approval.
Stocks for Punters
I avoid stocks like Acasti, and even Amarin. I’m not a scientist, although these days my son plays one in Minnesota. It’s the business of science to disagree at every stage of drug discovery. Skepticism helps drive the process. Thus, even a drug in a Phase 3 study, the last step before it becomes commercial, carries high risks for investors.
Even after a successful trial, as with Amarin’s Vascepa, there remain risks. It takes money to market a drug, and a company exhausted by the struggle to win U.S. Food and Drug Administration approval may not have enough.
This is where hedge funds come in, buying up the winners and seeking buyers for them among big pharma companies like Pfizer (NYSE:PFE) and Amgen (NASDAQ:AMGN). These companies, in turn, might then dramatically raise the drug’s price to earn a profit on what they paid, and on the advertising. Vascepa currently costs $414 for a 60-day supply.
Mind the Hype
While a drug is in a trial, information can be hard to come by and the price of the stock can be volatile. The company conducting the trial will put out positive news releases, because they believe in it, and investors may pile into what turns out to be a dry hole.
This was certainly true for Acasti, whose share price peaked at $3.08 in mid-December, when an Oppenheimer analyst put a $7 per-share price target on ACST stock. Analysts may claim a close relationship to management, but managers may paint rosy scenarios both to analysts and themselves. That seems to have been the case here.
The Bottom Line on ACST Stock
Buying stocks always entails risk. You don’t have a profit until you sell the stock and the cash is in your pocket.
That said, stocks in companies involved in drug discovery have much more risk than others. Vascepa is now thought to be a drug worth $4 billion per year. But even that could be wrong, if another drug comes along or problems are found after it reaches the market.
You should only consider buying such a stock if you can afford to lose your entire investment. They’re for young buyers with strong hearts.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
