When people invest in the biotechnology sector, they normally do so knowing the high level of risks involved. Indeed, it's been shown time and again that one bad result can be deadly to a biotech's valuation.
But when life-sciences company Sirtex Medical Limited (ASX: SRX) plummeted as much as 62% to an intraday low of $14.80 last week (down from $39), the shock was widespread throughout the market.
Indeed, the results of its SIRFLOX trial had been so widely expected to come back positive that investors were willing to pay more than 91 times Sirtex's 2014 financial year earnings for the stock.
One analyst had even slapped a $50.40 price target on the stock, which had it trading on a trailing price-earnings ratio of almost 119 times.
A result no-one was expecting
Unfortunately, the results were not what the market were expecting. While the company said that data from the trial showed a statistically significant improvement in the secondary endpoint of progression free survival in the liver, the primary endpoint of the trial was not met which was to show overall progression free survival.
Given the lofty premium at which the stock was trading – where success was all but expected – it perhaps shouldn't have come as such a surprise that the market reacted so swiftly.
However, since hitting that low of $14.80, the stock has recovered somewhat. In fact, the lucky investors who bought in at the bottom are sitting on a remarkable 45.6% gain after just seven trading days. By comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has risen a much more modest 2.9%.
Should you buy Sirtex Medical?
First and foremost, it should be noted that the biotechnology sector isn't for the fainthearted. As Sirtex and various other biotech stocks, including Acrux Limited (ASX: ACR) and GI Dynamics Inc (ASX: GID) have highlighted recently how the biotech sector can bring big losses.
While the final results of the SIRFLOX study will be released in May 2015, there could be more volatility between now and then, and it's anyone's guess as to whether the results will yield a positive or negative surprise. With Sirtex's shares having regained almost half of their value since that fateful day last week, there could be some profit-taking as investors look to limit their risks.
Sirtex is a great company, and one of Australia's few biotechnology stocks possessing true promise. While it is certainly one for long-term investors who are willing to look beyond its recent setback to consider, it is also not one for the risk-averse.
