Bad Drug Reaction

I was convinced that Cara Therapeutics had a winning drug. Oops! It crashed, and I got out after losing around 50 percent. I’ll stay away from pharmaceuticals going forward. — D.M., online

The Fool Responds: You’ve been hasty in several ways.

First, don’t dismiss an entire industry because of a bad experience with one stock. Given our country’s growing and aging population and the demand for drugs to cure or treat more conditions, the pharmaceutical industry’s future seems solid.

You weren’t necessarily wrong to invest in Cara Therapeutics, either. Many investors have been bullish on Cara, largely over the potential for its “CR845” drug in development, which targets chronic pain. In February 2016, the Food and Drug Administration (FDA) put a “clinical hold” on a late-stage clinical trial of CR845, sending the stock down, but the hold was lifted a few months later.

Any investor in biotechnology companies should have a good understanding of the industry and, ideally, the science involved. Setbacks are to be expected as promising drugs go through the usual series of clinical trials. Only a fraction of contenders pass all trials and end up approved by the FDA. Thus, investors often prefer to focus on biotech companies with deep pipelines featuring many drugs, ideally with a bunch in late-stage trials. Cara may end up a long-term winner, but it’s not without risks.