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Allakos Is a Cautionary Tale of Biopharmaceutical Investing

As recently shown, investing in Allakos (NASDAQ:ALLK) proves the inherent danger within the biopharmaceutical sector. After reaching a 52-week high of more than $157, ALLK stock plunged late in December and now sits just above $8 per share.

a scientist with protective equipment and microscope in a lab
a scientist with protective equipment and microscope in a lab

Source: luchschenF / Shutterstock.com

Biopharma companies often live and die by the initial success of a single compound. Once a compound receives the Food and Drug Administration (FDA) go-ahead, the sky is often the limit. An early drug’s success drives a strong revenue stream, setting up future successes.

The company may also seek FDA approval for a drug for other conditions, thus increasing revenue streams from a single compound. But what happens when things go wrong? Allakos recently gave us some insight into what that looks like.

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Allakos’ December Disappointment

Allakos describes itself as:

“… a clinical stage biotechnology company developing antibodies that target immunomodulatory receptors present on immune effector cells involved in allergic, inflammatory, and proliferative diseases. The Company’s lead antibody, Lirentelimab (AK002), is an investigational medicine that is being evaluated in clinical studies, including in EGIDs and a Phase 2 study in atopic dermatitis.”

As I alluded to in the beginning of this article, the success of a single compound is generally vital to biopharma companies. In this case, for Allakos, that drug is Lirentelimab.

Unfortunately for the company, Lirentelimab disappointed in two recent controlled studies. Neither study achieved statistical significance on patient-reported primary endpoints.

The particularly disappointing aspect of the issue is how far along things were. The Enigma 2 study was in Phase 3, and the Kryptos study was in Phase 2 and Phase 3. In essence, a long, drawn-out process requiring massive resources produced weak results.

That’s the lesson here.

A Marked Decline in ALLK Stock

It isn’t hyperbolic to suggest that ALLK stock dropped off a cliff on the news. It literally went from $84 to $8 overnight.

Succinctly put, Allakos is effectively back at zero. The sole remaining hope for investors is, as Chief Medical Officer Dr. Craig Peterson, MD stated:

“… the EGID results are surprising and disappointing, we will continue to analyze the data to understand the results and to determine the path forward for Lirentelimab in EGIDs. At present we intend to continue our development efforts with subcutaneous Lirentelimab in atopic dermatitis, chronic spontaneous urticaria, and asthma.”

That’s a rosy and hopeful outlook to be sure. The disappointing news also points to another consideration to be made when investing in biopharma companies: Financials mean nothing.

Allakos Q3 Results

Allakos released third-quarter earnings on Nov. 8. Investors with any passing understanding of biopharmaceuticals weren’t surprised. Issues were continuing to mount at that time.

The company lost $62.7 million in Q3, up from a loss of $42.1 million a year prior. Again, that was not surprising. The business model is fairly straightforward: Invest a lot of money upfront in developing a drug in order to reap a massive windfall when FDA approval occurs.

Allakos is very typical in that sense. $43.6 million of that $62.7 million loss in Q3 was attributable to research and development expenses.

And even though problems were piling on, it didn’t matter. ALLK stock fell when the news was released, but not by a significant amount. At that point, hope still sprung eternal.

Those Enigma 2 and Kryptos studies were what was important. If they had provided positive news, ALLK share prices would have rocketed upward.

ALLK Stock Is a Cautionary Tale

There really isn’t much more to say about Allakos. It’s simply a lesson in what happens when things go wrong in pharmaceutical development.

The company still had $505.6 million in cash at the end of Q3. It can therefore continue to develop Lirentelimab for other applications. But that is a long game at this point.

Some would suggest there’s a contrarian opportunity, given that ALLK stock carries a target price of $50. But that number is likely based on earlier projections around those recently-disappointing studies. That implies its $8 price makes a lot of sense right now.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

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