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Here’s why Novogen Limited rocketed 43%: Is the stock a buy?

Shareholders of Novogen Limited (ASX: NRT) were treated to an enormous rally on Thursday after the drug manufacturer reported a second successful cancer drug study in the space of a fortnight.

After having recently announced that its experimental anti-cancer drug, Cantrixil, killed human ovarian stem cells, Novogen yesterday reported that its experimental drug, Anisina, killed melanoma cells. While there are already drugs on the market that target a specific mutation of melenoma, Anisina could be a significant find given that it kills melanoma cells irrespective of their mutational status.

The company said: “The development of a drug that kills melanoma cells irrespective of their BRAF or any other mutational status has become an urgent clinical imperative… Novogen believes that Anisina represents a significant potential opportunity to meet this need.”

The risks of investing in biotechnology stocks

Novogen has experienced a terrific start to the year. While the stock skyrocketed 43.2% following yesterday’s announcement, it has rallied a remarkable 186% since the beginning of the year. That compares to a 9.5% lift for the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) index.

While biotechnology stocks such as Novogen are capable of generating enormous returns when a clinical trial proves successful, investors need to remember they can also result in crushing losses when trials do not succeed.

Take Sirtex Medical Limited (ASX: SRX) as a perfect example. As one of Australia’s most promising biotech stocks, investors were sure that its SIRFLOX study would prove successful. Unfortunately, things didn’t go according to plan and the stock plummeted more than 55% in one day, wiping more than $1 billion off its market value.

Should you buy Novogen?

Novogen is a much smaller company than Sirtex and is much earlier in its development stages. While the stock could generate  enormous profits if future trials also prove successful, it could also plummet in value at the first sign of failure. As such, investors need to consider their own personal circumstances and determine whether they are willing to take that risk.

As an important reminder, you should only ever invest as much as you can comfortably afford to lose on a company like Novogen, and ensure you maintain a well-diversified portfolio at all times.

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Motley Fool contributor Ryan Newman 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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