This is just one example of how volatile small-cap biotech companies can be.
Quantum Pharmaceuticals PLC (QP) issued a profit warning that sent its share price down 48 percent in one day, wiping out half of the stock’s market value.
The small-cap U.K. biotech company that specializes in niche pharmaceuticals, specials pharmaceuticals and medical adherence saw its stock drop from 70 to 36.5 pence from October 3rd to October 4th.
This almost 50 percent drop in share price reflects an equivalent drop in the company’s market capitalization, or its worth. It’s currently valued at £42 million, down from a £84 million on October 3rd. QP reported half-year net earnings of £0.96 million and decreased gross margins from 37.49 percent last year to 29.55 percent this year and operating margins down from 11.08 percent to 5.37 percent.
Specials pharmaceuticals, where unlicensed patient-specific medications are produced and sold, is the sector of the company that is generating healthy revenue at £10 million a year. NuPharm, however, a specials company QP acquired in July 2015, will be shut down by December, the company announced. It is the only one of four businesses under QP’s specials sector that’s losses played into the profit warning.
Niche Pharmaceuticals, which constitutes 25 percent of the U.K. pharma market, is the sector of the industry that develops and licenses niche medication. QP’s product sales in this division didn’t meet expectations because of all the competition in this sector hence the decline in gross margins. While revising its profit forecasts, QP decided to prioritize its specials division, particularly after cutting off NuPharm, the financial drain, while downsizing its niche division. The company now expects to end its fiscal year in January 2017 with a profit of £8.5 million.
Certainly not the first company to honestly convey a change in financial expectations, it begs the question: did QP suffer such a big shock because it’s a smaller player?
A 2010 Umea School of Business study found that smaller firms, categorized as such if they fell below the “industry median of the sample,” deal with more lashback after issuing a profit warning. Not surprisingly, investors duck and cover when they smell losses so it’s expected that QP’s stock price would decline. But being a small firm that’s also in the biotech industry creates even more apprehension for investors.
Even though biotech stocks have been rising in the past few years, these companies aren’t famous for making huge profits. Biotech revolves around materializing the ideas that the firms have rather than profiting from already successful medical products.
Due to the more speculative aspect of this subsector, Investors find biotech stocks difficult to analyze. Their worth is decided based on the outcome of clinical trials, suggesting the drug will either make it to consumers or not even make it to manufacturing. Add to this concerns of the company’s profitability, or lack thereof, it’s clear why these companies face such dramatic volatility in the financial market.