The Biggest Lesson From a Major Biotech Blow-Up
Let's break down what happened with Rocket Pharmaceuticals and how to deal with similar situations.
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The market action is mixed on Wednesday morning as investors digest the tariff relief gains from Tuesday and await earnings from the most crucial stock in the market, Nvidia NVDA, which will report after the close. Breadth is running negative, and there isn’t residual momentum after the decisive move on Tuesday.
On Tuesday, a stock I have discussed numerous times blew up and sold off 62%. Rocket Pharmaceuticals RCKT announced the death of a patient in its Phase 2 trial of gene therapy treatment for Danon disease, which is a rare and fatal heart disease. The FDA placed a clinical hold on the trial, and the company will investigate what happened.
Events of this sort are one of the big risks in clinical biotechnology. It is a good example of how stocks with the biggest potential rewards also carry the most risk.
One of the main reasons that I was interested in the stock was the very hefty price targets set by analysts. These analysts have far more access to company management and information than average investors, but obviously, they also can be very wrong and couldn't foresee what happened in this case.
Prior to Tuesday, the lowest price target for RCKT was $15. There are 15 analysts covering the stock with estimates as high as $55, with many in the $30s and $40s. All of them were wrong and have now substantially cut their estimates.
If you are an aggressive trader, like I am, these things happen. It is just the nature of the beast, and they need to be taken in stride.
The biggest lesson is to make sure you have some diversification so that no one blow-up can impair capital. The risk in this situation looked quite low because the studies have been ongoing for some time with no major problems.
There was a good likelihood of strong data later this year, which probably would have doubled the stock. It didn’t happen, so we move on to the next one. I still have a small position in RCKT, but I don’t expect anything to happen there for a while.
The weaker action after the big move on Wednesday is a bit of a concern, and the Nvidia report tonight will tell us something about the market mood. I don’t see any reason to add exposure right now.
At the time of publication, Rev Shark was long RCKT.
