ALLK action is a warning about biopharmaceutical investment
As has been shown recently, investing in Allakos (NASDAQ:ALLK) proves the inherent danger in the biopharmaceutical sector. After hitting a high of over $ 157 in 52 weeks, ALLK stock plunged in late December and now sits just above $ 8 per share.
Biopharmaceutical companies often live and die from the initial success of a single compound. Once a compound receives the green light from the Food and Drug Administration (FDA), the sky is often the limit. The success of an early drug generates a strong source of income, paving the way for future success.
The company can also seek FDA approval for a drug for other conditions, thus increasing the revenue stream of a single compound. But what happens when things go wrong? Allakos recently gave us a preview of what it looks like.
Allakos’ disappointment in December
Allakos describes himself as:
“… a clinical stage biotechnology company developing antibodies that target immunomodulatory receptors present on immune effector cells involved in allergic, inflammatory and proliferative diseases. The Company’s main antibody, Lirentelimab (AK002), is an investigational drug currently being evaluated in clinical studies, particularly in EGIDs and a phase 2 study in atopic dermatitis.
As I mentioned at the start of this article, the success of a single compound is generally vital for biopharmaceutical companies. In this case, for Allakos, this medicine is Lirentelimab.
Unfortunately for the company, Lirentelimab disappointed in two recent controlled studies. Neither study reached statistical significance on the patient-reported primary endpoints.
The particularly disappointing aspect of the matter is the progress of the matter. The Enigma 2 study was in phase 3 and the Kryptos study was in phase 2 and phase 3. In essence, a long and drawn-out process requiring massive resources produced poor results.
That’s the lesson here.
A marked drop in ALLK stock
It’s not hyperbolic to suggest that ALLK stocks have fallen off a cliff on the news. It literally went from $ 84 to $ 8 overnight.
In short, Allakos has effectively returned to zero. The only hope left for investors is, as Chief Medical Officer Dr Craig Peterson, MD said:
“… The EGID results are surprising and disappointing, we will continue to analyze the data to understand the results and determine the way forward for Liretelimab in EGIDs. At this time, we intend to continue our development efforts with subcutaneous Lirentelimab in atopic dermatitis, spontaneous chronic urticaria and asthma.
It’s a rosy, hopeful prospect to be sure. The disappointing news also points to another consideration to consider when investing in biopharmaceutical companies: Financial data means nothing.
Allakos third quarter results
Allakos released its third quarter results on November 8. Investors with a fleeting understanding of biopharmaceuticals were not surprised. The problems continued to mount at this time.
The company lost $ 62.7 million in the third quarter, down from $ 42.1 million a year earlier. Again, it was not surprising. The business model is pretty straightforward: invest a lot of money up front in developing a drug in order to reap a massive windfall when FDA approval is obtained.
Allakos is very typical in this sense. Of the $ 62.7 million loss in the third quarter, $ 43.6 million was attributable to research and development expenses.
And even if the problems piled up, it didn’t matter. ALLK stock fell when the news broke, but not significantly. At that time, hope was still eternal.
Those Enigma 2 and Kryptos studies were what was important. If they had provided positive news, the ALLK share price would have soared.
ALLK Stock is a warning
There really isn’t much more to say about Allakos. It’s simply a lesson in what happens when things go wrong in pharmaceutical development.
The company still had $ 505.6 million in cash at the end of the third quarter. It can therefore continue to develop Lirentelimab for other applications. But it’s a long game at this point.
Some suggest there is a contrarian opportunity, given that ALLK stock has a target price of $ 50. But that number is likely based on earlier projections of these recently disappointing studies. This implies that its $ 8 price tag makes a lot of sense right now.
As of the publication date, Alex Sirois does not have (directly or indirectly) any position in any of the titles mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Alex Sirois is an independent contributor to InvestorPlace whose personal equity investing style focuses on long-term, buy and hold stock selections that create wealth. Having worked in multiple industries, from ecommerce to translation to education and using his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.