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Why Neuren Pharmaceuticals Ltd (ASX:NEU) shares have been smashed today

One of the worst performers on the Australian share market on Tuesday has been the Neuren Pharmaceuticals Ltd (ASX: NEU) share price.

The shares of the biopharmaceutical company developing therapies for brain injury, neurodevelopmental and neurodegenerative disorders are down a massive 44% to $1.50 in early afternoon trade.

What happened?

This morning Neuren Pharmaceuticals announced that it has entered into an exclusive North American license agreement with ACADIA Pharmaceuticals for the development and commercialisation of trofinetide for Rett syndrome and other indications.

According to the release, ACADIA plans to initiate a Phase 3 study of trofinetide for the treatment of Rett syndrome in the second half of 2019.

Neuren retains all rights to trofinetide outside of North America and will receive an upfront fee of US$10 million plus potential milestones of up to US$455 million and tiered, escalating, double-digit percentage royalties on net sales of trofinetide.

So why are Neuren Pharmaceuticals’ shares being smashed today?

Whilst this deal has the potential to generate significant revenues in the future for the company, I suspect that the market is a little underwhelmed by the upfront payment received and perhaps the company that it has signed the deal with.

Management believes ACADIA is more than capable of developing this novel treatment for Rett syndrome patients, but it isn’t a well-known pharmaceutical company that many had hoped Neuren would have teamed up with.

Should you buy the dip?

This selloff could arguably make Neuren a bargain buy if trofinetide is a success in the North American market. But there is still a long road ahead and success is far from guaranteed.

In light of this, I would hold off an investment for the time being and look at others that are already generating sizeable revenues such as CSL Limited (ASX: CSL) and Mayne Pharma Group Ltd (ASX: MYX).

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Motley Fool contributor James Mickleboro has no position in any of the 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 Scott Phillips.

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