It has been a tough start to the week for shareholders in Affymax (AFFY), with the company’s stock selling off 85% at the open Monday morning.
The the selloff highlights the inherent risks associated with investing in biotech companies, where fortunes can be made or lost overnight.
The problem is related to the company's drug Omontys, which is a once-a-month injection to help patients on dialysis for chronic kidney disease. Some patients have had a negative reaction to the treatment, leading to anaphylaxis shock and which has been fatal in some cases.
While just 0.02% of patients have died as a result of the treatment, that is too many, forcing the company, along with the Food and Drug Administration, to pull the drug.
The last twelve months for Affymax is the perfect example of why investors should be weary of biotech companies, especially those that do not have a solid pipeline of new drugs. Affymax went from $4 to $27 in the year after Omontys hit the market, but unfortunately the company has nothing solid coming down the pipeline.
The company has just two drugs in the pipeline, and one of those is a new version of Omontys. As a result the stock is taking a beating, and there is nothing the company can do to bring confidence back.
When investing in biotech companies, investors need to be very aware of the risks they entail. It only takes one bad headline and the gains will be quickly erased, as is the case with Affymax today.
If you want to play the biotech sector, you may want to consider going with a biotech ETF such as the SPDR S&P Biotech (XBI). You get diversified exposure to the sector, but never run the risk of a total implosion like Affymax's Monday collapse.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. In addition to writing for Fresh Brewed Media, Michael also wrote for AOL's BloggingStocks for three years, focusing most of his attention on the energy and technology sectors. Follow him on Twitter at @MFatMICenter.