You Should Be Selling XBiotech Stock After the Huge Gains

Two weeks ago, XBiotech (NASDAQ:XBIT) announced positive results from a small Phase 2 trial. It tested its antibody bermekimab for an uncommon inflammatory skin disorder called hidradenitis suppurativa “HS.” Since the positive results, XBIT stock has been flying.

XBIT Stock: You Should Be Selling XBiotech Stock After the Huge Gains

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In fact, XBiotech stock is up from around $5 at the start of the year to $10. Traders have grown really enthusiastic, bidding shares up another 15% on Wednesday. This is a stunning turnaround from last September, when the stock plummeted to as low as $2.13 per share. At this time, it makes sense to be cautious about XBIT stock following this huge rally.

Reasons For Skepticism

When evaluating biotech companies, there’s one thing that should always make you nervous. When you see a company trying to use the same product for many different conditions, it is often a bad sign. XBiotech falls firmly into that category.

Over the years, XBiotech has tried their proprietary antibody for a dazzling array of clinical conditions. These include, but are not limited to: colon cancer, lung cancer, vascular restenosis, leukemia, diabetes and even ebola. After the big colon cancer effort failed to deliver what shareholders had been hoping for, the company also brought in Dr. Peter Libby to head up the company’s efforts to try their antibody for heart disease and stroke.

Given the way science works, if you run enough small trials, you are likely to hit statistical significance at least occasionally purely by luck. Keep trying your therapy in different applications and it will probably show a result, eventually, somewhere. For seasoned biotech investors, however, a company seemingly using their therapy as a cure-all is usually a clear sign to avoid the stock.

Past XBiotech Data Issues

XBiotech has run into numerous situations which raise doubt during its short life as a public company. For one, it seems to use promotional language on many occasions. For example, in its initial IPO prospectus, the company suggested that in a trial for the pyoderma gangrenosum clinical condition: “findings in several patients suggest improved wound healing.”

The SEC, however, had questions about this statement, forcing XBiotech to offer up a rather less exciting version of the story. XBiotech replied to the SEC that only two patients received the full treatment. They ceded the point that because “the Company does not have sufficient patients numbers at this point, any data results could possibly be misleading to investors.”

That wasn’t XBiotech’s only brush with potentially misleading investors. In their much-anticipated colorectal cancer trials, XBiotech again presented what seemed like promising data. However, this was based on what several observers deemed flawed trial design and an odd choice of clinical endpoints. In the end, XBiotech’s cancer data reportedly fell apart under scrutiny.

Will Things Turn Out Better Now?

XBiotech has pivoted from cancer to skin conditions with its same clinical therapy. Again, it’s something to note when a company thinks one product can cure so many diseases. However, the company did report what seems like promising results in several trials for dermatological conditions. Some doctors and observers have lauded the data as “promising” and “stellar.”

Of course, one must use critical thinking. The latest trial, the one that seems to have started the huge run in XBIT stock, only involved 42 patients. It also is just a Phase 2 trial, which is not designed to garner FDA approval. The majority of drug candidates that pass Phase 2 trials fall apart in Phase 3 when more rigorous trial designs come into play.

Many microcap biotech companies can show promising results in Phase 2, but struggle to deliver the goods in much larger and more conclusive Phase 3 trials. Given XBiotech’s past history with this same compound in other conditions, it’s best to be cautious.

XBIT Stock Verdict

I’m not an investor in many clinical-stage biotech companies, and that certainly applies to XBIT stock. As it is, most biotech companies without a commercialized product fail, and many of those have more promising stories than XBiotech.

It’s possible that this compound works in skin conditions despite not working previously in cancers, diabetes and a host of other conditions. But looking at the history of biotech development, the odds are pretty long.

As for the stock’s recent run, almost all commentary on social media relates to momentum and technical analysis. It seems like most people driving the stock up now are short-term traders. And that’s fine. But don’t take the recent price action as a sign of any special or inside knowledge about upcoming fundamental developments from XBiotech.

And, unfortunately for shareholders, once momentum stops, it tends to reverse pretty quickly. When the people who own a stock are there for technical and momentum reasons, they tend to bail as soon as the price starts declining. If traders don’t understand or care about a company’s fundamental story, they won’t stick around for long. All that is to say that XBIT stock will be vulnerable to a large decline in coming weeks.

What would stop the current enthusiasm for Xbiotech? A market correction generally would probably cause shares to decline. There is also the possibility that it will want to raise money while the share price is high.

That said, and I will give XBiotech credit here, they still had $21 million in cash as of last quarter and are only burning about $4 million per quarter in operating costs. That suggests they can make it through 2019 without raising more money.

Still, that’s hardly enough reason to hold onto XBIT stock after such a huge run-up.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

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