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The big reason why Pharmaxis Ltd shares slumped today

Biotech stocks can certainly be volatile.

Today Pharmaxis Ltd (ASX: PXS) dropped 16.9% to 6.4 cents, after the company announced that it may not receive a second tranche payment of US$20 million from partner NovaQuest, after a dispute erupted.

NovaQuest is alleging that Pharmaxis has breached its funding deal. The company is accused of not working in a commercially reasonable manner to obtain reimbursement status for its cystic fibrosis drug, Bronchitol, from key European governmental and non-government payers. As a result, NovaQuest has threatened to withhold a US$20 million payment, which may be the knockout blow for Pharmaxis.

The biotech is still recovering from its third knockback by the US Food and Drug Administration (FDA) for Bronchitol, as well as disappointing trial results, which saw its shares plummet 50% in March last year. It’s not alone though, Acrux Limited (ASX: ACR), Prana Biotechnology Limited (ASX: PBT) and QRxPharma Ltd (ASX: QRX) have also experienced volatile share prices in the last year or so.

Pharmaxis CEO Gary Phillips says, “The full investment of US$40 million by NovaQuest is central to our business plan, and the Agreement entered into 18 months ago“.

Mr Phillips added that it puts in jeopardy a clinical trial, which is a key step to FDA approval, as well as a US partnering agreement, which included partial funding of the trial, payment of significant approval and sales milestones and a share of sales revenues.

Partner deals can make or break biotech stocks. Bionomics Ltd (ASX: BNO) shares soared 17% in late June this year, after the company announced a deal with giant pharmaceuticals company Merck & Co, worth up to a cool US$506 million.

If Pharmaxis can’t resolve the dispute with NovaQuest, the company’s options appear limited. While it still has some cash, it is burning through it at a fast pace.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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