Has Novogen Limited really made a blockbuster breakthrough?

Biotech business Novogen Limited (ASX:NRT) says it has made a potentially significant breakthrough in the treatment of melanoma.

Tom Richardson

Tom is a holder of the CFA Society of the UK administered Investment Management Certificate (IMC) and has more than a decade's professional experience in the investment management industry in Australia and the UK. Tom now works as a writer and editor for TMF Australia and has two easy to remember rules of investing he likes to follow. Avoid overpaying for growth stocks and avoid paying at all for stocks that are cheap for a reason. Tom prefers growth investing over value investing and says it's not rocket science, just avoid overpaying for the best returns.

Published December 17, 2014 1:02 pm AEDT

Dual-listed biotech business Novogen Limited (ASX: NRT) (NASDAQ: NVGN) yesterday announced a potentially important breakthrough in its quest to grow into a global pharmaceutical force via its best-in-class proprietary drug technology.

The company says pre-clinical trials have shown that its lead candidate product, TRXE-009 or Trilexium, is highly active in the treatment of melanomas. The drug was originally developed for the treatment of brain cancers.

The company also says the drug could potentially be used for the treatment of secondary brain cancers due to melanoma, for which there are currently no effective therapies.

Novogen also claims it has found evidence for the first time of an hypothesized link between brain cancer and melanoma. Evidence of an hypothesized link is an interesting turn of phrase, but the drug's new found potential to treat skin cancer is clearly exciting investors.

Since announcing the "breakthrough" news the stock has tripled in value from 8 cents on Monday to 24 cents today. This is good news for the company as key to the hopes of many early-stage biotech businesses is raising sufficient capital to help fund daily operations and expensive clinical research required to prove a drug's efficacy in treating degenerative human health conditions.

Publically-funded research and development grants or tax benefits granted by the ATO are another important source of funds for early-stage biotech businesses.

Investors should be aware that for every blockbuster success such as liver cancer treatment business Sirtex Medical Limited (ASX: SRX), there are many more businesses that don't succeed. Indeed, Novogen has a significant prior history of announcing capital raisings, breakthrough developments, and important discoveries that have amounted to little so far.

Of course this doesn't stop speculative investors chasing huge returns in the belief that they really have found the next multi-billion dollar global pharmaceutical business.

These kinds of speculative biotech stocks also attract day traders interested in promoting a stock for short-term profits, excited media reports, and public relations spin that may sway some investors into making rash decisions.

It's for these reasons that interested investors should approach this stock with caution and be aware of the considerable risks.

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