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Cramer: Are high-reward biotech bargains worth it?

Cramer: Are high-reward biotech bargains worth it?

Until approximately four months ago, Jim Cramer considered biotech stocks as one of the hottest groups out there on the stock market. This included the sizzling small development-stage biotech, as investors were drooling over bountiful mergers and acquisitions that propelled the group higher.

However the group went into free-fall in the spring and biotechs were slammed hard, making the smaller biotechs very difficult to own, especially since many have no actual products or profits. And Cramer has seen that when traders and investors get freaked out in a bear market, there is really nothing that can put a floor under these stocks.

"I always tell you that speculating on early-stage biotechs is a risky business that is not for the faint of heart, but after one of these stocks has been put through the meat grinder, at what point does it make sense to start shopping for bargains?" Cramer asked.

That is why Cramer decided to take a closer look a Puma Biotechnology, an early-stage biotech that was smoking hot until it took a nose dive this year. Puma came on to investor radars from the strength of a single drug called Neratinib, an anti-breast cancer therapy that could have multiple applications for other types of cancer.

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Puma's stock more than quintupled in 2013 and continued to roar for most of 2014, more than doubling in a single session last year after it announced positive top-line results from Neratinib's phase 3 trial.

But then the stock hit a wall. The main issue was that Puma only had one drug, even if it did have more than one application. That means the stock is all about the one drug, so when the data was encouraging the stock roared higher. But when the data looked less compelling, the stock dropped and hasn't recovered. It has now lost 67 percent of its value since its peak a little over a year ago, plunging to $94 from $279.

So has the stock finally bottomed, and does it make sense to own it?

The reason why Puma initially tanked was after a different trial on its drug found that approximately 30 percent of patients taking it experienced severe diarrhea. That caused the stock to sink 10 percent the next day.

The next leg down happened going into the American Society of Clinical Oncology meeting in early June. The stock was clobbered after investors took a closer look at the data and found some real issues with it.

However, JPMorgan believes the market's reaction to Puma's data at the oncology conference was too severe. So while Neratinib is less attractive than initially thought, analysts say the drug is still effective and if Puma can control the diarrhea problem, it could have real upside.

Given that Puma is already studying their key drug in combination with Imodium to control the diarrhea, the bulls at JPMorgan think that the compound's benefits could outweigh the safety risks and are betting that the FDA will agree.

As for Cramer, he thinks Puma is the quintessential high-risk, high-reward biotech. If the upcoming data on the company is positive, the stock could potentially go higher. But if things don't go well, the downside could be enormous.

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"Given the treacherous nature of this market, I think the risk far outweighs the reward, the fundament of all stock investing. If Puma had any other drugs in the pipeline, it would be an easy call. But doesn't and that's what controls," Cramer said.

So if the market were running with the bulls right now, then Cramer would agree with JPMorgan that Puma is worth buying for speculation. But the market is clearly in bear territory right now, which makes it more difficult.

Ultimately, Cramer advised investors who do want to speculate on the stock to wait for it to come down to $80. And if it doesn't come down to that price, then just take a pass. There are plenty more stocks out there with less risk and more reward.

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