Small-cap biotechnology hopeful Alchemia Limited (ASX: ACL) has experienced a major setback today after it provided investors with an update on its quarterly profit.
As it emerged from a week-long trading halt, the stock plummeted 53% to trade at just 3.9 cents, wiping more than $13 million from its market value. Alchemia is a drug discovery and development company which is predominantly focused on 'fondaparinux' an FDA approved, injectable antithrombotic. It markets this drug via partner Dr. Reddy's Laboratories ("Dr. Reddy's").
In today's update, Alchemia said that it has achieved revenues of $1.25 million from its share of net profit of US-only sales during the quarter. That represents a fall of 6.9% compared to the prior period (the three-months ended 31 December 2014), which it attributed to a 27.5% fall in gross sales and a 17.2% reduction in the net selling price.
Although Dr. Reddy's market share of fondaparinux sales volume in the US continued to improve, overall sales volume fell by 10.3% during the quarter, following a 2.8% fall in the previous quarter. This is due to a decline in the total market for fondaparinux, together with aggressive marketing from rival Mylan.
Commenting on the latest results, the company said: "Dr. Reddy's has advised Alchemia that, based on their assessment of actual sales returns of fondaparinux to date, the current level of sales returns provision used in calculating the net profit share is unlikely to be sufficient to cover future returns of product."
The risks of investing in biotechs
One of the main attractions of investing in biotechnology stocks is that successful results can set the market on fire, where fortunes can be made instantaneously. This has been demonstrated by companies such as Sirtex Medical Limited (ASX: SRX) and ResMed Inc. (CHESS) (ASX: RMD) over the years, while Prima BioMed Limited (ASX: PRR) is an even more recent example, having skyrocketed more than 760% in the space of just three days (although it has retreated considerably since).
While it is the big returns that lure investors into the sector it is the enormous level of risk associated with such stocks that make those kind of returns possible. In more cases than not, investing in the sector can lead to heavy losses, as has been shown by Alchemia.
Of course, investors may get lucky from time to time, but in the case of Alchemia, it seems investors would be well advised to stay away altogether. A much safer option than Alchemia..
