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Devastated: Why Resapp Health Ltd shares just plunged 80%

The Resapp Health Ltd (ASX: RAP) share price fell 81% to $0.06 this morning, after the company’s announcement of its Smartcough C study results. The findings speak for themselves:

  • ‘Analysis of the SMARTCOUGH-C study data revealed many issues in the quality of cough recordings and that many patients were treated before their coughs were recorded’
  • ‘…predefined endpoints for positive percent agreement and negative percent agreement with clinical diagnosis are unlikely to be met’

It is difficult to know where to start. ResApp blames the failure of its trial on the failure of clinical research staff to record cough sounds before treating the patient. Additionally, background noise was thought to have interfered in at least some cases.

In my opinion, this reflects an abysmal level of study quality. If you are recording a sick person’s cough for use in diagnostic software, obviously you need to record them when they are sick and not after they have been treated. Understandably, the diagnostics will probably prove useless if the sounds of two people coughing are recording at once. This suggests lax supervision on behalf of ResApp and/or the trained (‘trained’) research staff.

In December 2016, executive director and VP of corporate affairs, Brian Leedman, dumped 6.8 million shares on the market.

On top of that, the company was valued at $200 million, had no sales, and its value hinged on the outcome of an unknowable variable – the results released this morning.

We have written previously warning about ResApp:

July 2016

September 2016

July 2017

In my view, ResApp is still significantly overvalued, as it is burning cash at a prodigious rate and has no sales. Given the trial issues mentioned above, an investor has to ask, ‘is this the kind of research & development process that could make this company a fantastic healthcare business?’ Things may improve in the future, but the answer for now is a resounding ‘no’. I would still avoid ResApp at all costs.

Unfortunately, ResApp is just the latest example of how buying into overpriced biotech stocks can lead to huge losses if unsuccessful. Innate Immunotherapeutics Ltd (ASX: IIL) was another one which crashed 91% in June after a similarly bad set of results.

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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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