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Devastated: Paradigm Biopharmaceuticals Ltd share price plunges 55%

The Paradigm Biopharmaceuticals Ltd (ASX: PAR) share price dived 55% to $0.32 this morning, after the company announced a failure in its phase 2a hayfever trial.

While the company has not yet seen the results of its tests (which were conducted by an independent organisation), Paradigm was informed that the primary endpoint of its trial was not met. In other words, its hay fever treatment did not have the desired effect.

Management stated that the treatment formulation may need to be optimised, which could imply a different method of delivery, a stronger dose, or similar.

The company also has research underway into other illnesses such as Ross River Fever virus, so investors can also hope for a breakthrough in other treatments.

Despite the fall, Paradigm shares are still overvalued

Still, as we have written many times before, investing in drug companies in the early stages of their research is incredibly risky. At a guess, even if we assume that Paradigm’s underlying treatment is effective (and there are no guarantees of this) it could be 3 or more years away from commercialising its treatment and generating revenues.

This company only had $4 million cash in the bank at the end of March, and burned $1 million in cash in that quarter. It has a $40 million market capitalisation with no sales and is years away from being able to sell its products.

That’s not an attack on Paradigm, by the way, simply a reflection that owning shares in this sort of business is not a viable way of growing your wealth over time. Prudent investors confine this sort of business to a very small part of their portfolio, and I would also recommend avoiding companies that do not have at least a successful Phase 2 trial under their belt.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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