Greater Fools Love Delcath, Zalicus On Orphan Drug Derpitude

NEW YORK ( TheStreet) -- The trading in Delcath Systems ( DCTH) Wednesday is a fantastic example of the greater fool theory at work in the biotech sector. Last week, it was Zalicus ( ZLCS).

Delcath shares are up an unbelievable 112% to 66 cents on word that the FDA granted orphan drug designation for use of the company's ChemoSat procedure to treat primary liver cancer.

News alert: FDA grants orphan drug designation based on the number of patients diagnosed with the disease, not on the efficacy or safety of a drug.

Any drug designed to treat a disease affecting fewer than 200,000 patients in the U.S. can be granted orphan disease status. Primary liver cancer is diagnosed in about 26,000 people in the U.S. each year, according to the American Cancer Society.

26,000 is less than 200,000, therefore ChemoSat qualifies as a orphan drug.

Here's the problem for Delcath, from the FDA regulations:

The granting of an orphan designation request does not alter the standard regulatory requirements and process for obtaining marketing approval. Safety and effectiveness of a drug must be established through adequate and well-controlled studies.

Uh oh.

If you're a momentum trader who doesn't know Delcath from Del Monte but is simply hoping to flip your stock to the next guy waiting in line, you should know that FDA already rejected ChemoSat for use in treating liver tumors. It just happened last month.

You see, orphan drug designation sounds awesome, but it hasn't prevented Delcath from blowing up already and it won't help resurrect the company or its product in the future.

Cue the ugly looking stock chart, caused by ChemoSat's many troubles: DCTH Chart DCTH data by YCharts

Hurry up, flip those Delcath shares before your "greater fool" reads this article.

I mentioned Zalicus above. Same thing happened on Sept. 27, when the company issued a press release announced FDA granting orphan drug designation for the experimental drug Z160 for the treatment of shingles-related pain.

Check out the chart: ZLCS Chart ZLCS data by YCharts

What's most interesting about Zalicus is that there are some legit reasons for investors to be paying attention to Z160. The company announced on Sept. 3 the completion of patient enrollment in two phase II studies, with results expected in the fourth quarter.

Take another look at the Zalicus chart. The stock didn't react at all to the Sept. 3 announcement. It only started moving on the relatively meaningless orphan drug announcement.

Greater fools.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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