Biotech Stock Mailbag: Labopharm

BOSTON (TheStreet) -- Pull up a six-month chart on Labopharm(DDSS) and you'd think something bad happened to the Canadian drug maker in early February. The stock went from around $1.40 last November all the way to a three-year high of just a penny under $3 on Feb. 3. But just as quickly, the stock round tripped under relentless selling pressure and is now back to around $1.60.

What happened in early February to trigger that much selling in Labopharm? Surprisingly, the U.S. Food and Drug Administration approved the company's new antidepressant Oleptro.

Yes, it was an FDA drug approval, not a rejection, which killed Labopharm's stock price. Confused? Many readers of the Biotech Stock Mailbag have been scratching their noggins over this one.

"I don't get it. Labopharm gets FDA approval and is about to launch a new drug into the multi-billion dollar anti-depression market but the stock is getting killed. Please explain what I'm missing here," writes Hank R.

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Chris H. writes, "Could you do a piece on Labopharm? Do you think Labopharm is a buy at these levels? What kind of revenues do you see from their new depression drug?"

And "KIR465" pleads, "I bought Labopharm the day before the approval thinking it would go higher, but now I'm stuck. What should I do?"

Investors seem to be reacting to the approval of Oleptro as if the drug had been rejected because the commercial picture is very fuzzy. Oleptro is a once-daily formulation of trazadone, an anti-depressant and sleep aid that's been marketed since the early 1980s and is now generic and cheaply priced.

Oleptro is designed to be more convenient than the immediate-release form of trazadole currently prescribed by doctors, but is that enough to convince doctors to switch? And more importantly, will insurance companies reimburse patients who want to take Oleptro over a cheap generic?

The market has its doubts, which is why Labopharm's stock price plunged after Oleptro's approval. For its part, Labopharm has done little to assuage nervous investors. The company's approval was based on data comparing Oleptro to a placebo, which means there is little or no comparative data to demonstrate Oleptro's advantage over generic trazadone (other than convenience, which is a much tougher sell these days.)