Biotech stock crashes 70% after a failed drug trial

Shares of Eleven Biotherapeutics fell to nearly zero on Monday after the company announced failed test results on a key drug.

In a statement Monday, the company said its lead drug candidate failed a Phase 3 study to treat moderate to severe dry eye disease.

The stock tumbled by more than 70% to around $US3.57 per share. It’s down 71% year-to-date, and 69% from its February 2014-IPO price.

Eleven’s market cap is currently at $US66 million.

CEO Abbie Celniker said: “We are disappointed that our Phase 3 study in dry eye disease did not meet its primary efficacy endpoints, but we are encouraged that we continue to see a favourable tolerability profile for EBI-005 [the drug.]”

The company said it will continue to develop the drug for unmet medical needs in allergic conjunctivitis, commonly known as pink eye.

“Based on these top-line results, the company does not see an immediate path forward for EBI-005 in dry eye disease, and we will not be initiating the second Phase 3 study of EBI-005 in dry eye disease that we had planned to start in the second half of this year.”

In its statement, the company noted it has about $US59 million of cash and cash equivalents, which it expects will see it through the second half of next year. Eleven has $US15 million in debt.

A 70% drop in one day is virtually unheard of for stocks in other sectors. Biotech investors, however, must understand that they are often taking a wild guess on whether a company’s drugs will pass the various trials required before a product makes it to pharmacy shelves.

And so, news like this is enough to spark a wild selloff, as a company’s future could hinge on one drug.

And with all the mergers and acquisitions in the biotech sector, as well as surging valuations, some analysts are convinced its in a bubble.

Here’s a chart showing the plunge on Monday.

NOW WATCH: Here’s the trick to being more productive

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.