Sometimes, a big sell off can also be a big opportunity. But that’s not the case here with biotech play Deciphera Pharmaceuticals (NASDAQ:DCPH). On Nov. 5, DCPH stock took a sudden plunge of more than 75%. The cause for this plunge was disappointing results from an Intrigue Phase 3 clinical study of its flagship candidate, a treatment for advanced gastrointestinal stromal tumors (GIST) known as Qinlock.
In subsequent weeks, it has experienced a further slide in price. Changing hands at around $8.50 per share, it’s down 77% from where it was before the trial news, and about 85% below where it was at the start of 2021. With such a dramatic drop in price, some may see this as a buy, after it’s fallen out of favor.
But the thing is, I wouldn’t exactly call this an overreaction to bad news. A lot of the time, the market calls it right. This is one of those times. With its late-stage trial setback, analysts and investors are reassessing their projections. It made sense for shares to experience such a dramatic drop on the news.
Now, Deciphera has other candidates in its pipeline. Not only that, Qinlock is already on the market, as a fourth-line treatment for GIST.
But there’s hardly a big enough potential market to justify even DCPH stock’s post-sell off valuation. And with its cash reserves dwindling, it’s best to stay away.
DCPH Stock at a Glance
Last year, Qinlock received Food and Drug Administration (FDA) approval for use as a fourth-line treatment for GIST. That is, it can used as a treatment for individuals with GIST, that have tried three or more prior therapies.
Since the FDA had already approved Qinlock, it may seem strange that Deciphera still went forward with a Phase 3 study. But that approval is only for fourth-line treatment status. And although this has enabled the company to commercialize Qinlock, it needs the go-ahead to move up the treatment sequence before it can become a real blockbuster drug.
That’s why it was conducting the aforementioned Intrigue Phase 3 clinical study. It’s also why DCPH stock tanked on the trial data news.
As InvestorPlace’s Chris MacDonald wrote Nov. 5, the study failed to demonstrate any improved results from using Qinlock, versus existing treatments. With this, its projected peak sales are now projected to come far below prior estimates.
Once projected to be as much as $1.2 billion dollars, analysts at Stifel (NYSE: SF) now project peak annual sales of just $200 million. Of course, some level of commercial success is better than no success at all. But this figure was hardly enough to justify Deciphera’s market capitalization right before the Phase 3 results were released ($2.1 billion). Worse yet, even after its massive decline in value, shares may have more room to move lower.
Why Deciphera Is No Bargain at Today’s Prices
After a more than 75% drop in a matter of weeks, you would think DCPH stock would be on the verge of bottoming out. Unfortunately, there are signs this will not be the case. First off, while Qinlock isn’t the only drug in its pipeline, its other treatments are still years away from the commercialization stage.
That means, for the time being, sales of its main drug will be its sole source of revenue. Revenue could rise from here, as it has just received the go-ahead from health authorities to market it as a fourth-line treatment in Europe. However, Stifel included overseas markets in its gloomy peak sales estimate.
This level of sales may appear sufficient to justify the stock’s current valuation (market capitalization of $488 million). But you need to keep two things in mind. First, $200 million in peak annual sales may be the best Deciphera can do in terms of monetizing Qinlock. Sales could end up coming less than this estimates, resulting in a further valuation reassessment.
Second, besides potential revenue, you need to consider likely operating expenses in the years ahead. Assuming the company will continue in its efforts to both expand the label for QINLOCK, plus develop further its other candidates, even with $200 million per year coming in, cash burn could remain high. For now, it has plenty of cash to sustain operations (around $342 million). However, further cash burn may concern investors, as it may indicate future dilutive secondary offerings to raise more cash.
The Bottom Line on DCPH Stock
Just prior to the Intrigue study, Deciphera had big potential to expand usage of Qinlock, enabling it to one day generate billions in annual sales from the GIST treatment. Now, it will likely generate just 15 to 20 percent of the peak annual sales once projected. With this, the stock’s rapid more than 75% decline, and continued drifting lower, would make sense.
In short, Qinlock’s potential is severely limited, and the rest of its pipeline is far from the commercialization stage. With this, expect DCPH stock, which comes in with an “F” rating in Portfolio Grader, to remain a clear-cut “avoid” situation.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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