After the stock of Alder BioPharmaceuticals fell off a cliff, plummeting to just over $12 on Thursday from its $55 peak two years ago, Jim Cramer had to find out what went wrong.
The decline was only accelerated on Wednesday when the small-capitalization company announced a huge secondary offering and the stock lost almost 20 percent of its value.
The stock recovered slightly when the offering was priced at $10 a share, which made the "Mad Money" host wonder if the worst is finally behind the development-stage biotechnology name.
Alder's primary business is focused on developing genetically engineered antibodies designed to treat various diseases. Along with its top drug, a Phase 3 migraine treatment, it has a migraine treatment in development and an arthritis drug in the early stages of clinical trials.
"The data here seemed pretty good, at least until a few weeks ago," Cramer said. "Chronic migraines are a serious problem, one that costs businesses $13 billion every year as a result of lost workdays. So a drug that could effectively prevent migraines would be very, very valuable, not just to the people who suffer from this painful condition, but also for their employers."
Plus, the only FDA-approved treatment for migraines is Allergan's Botox, and based on Alder's Phase 2 data, its migraine drug would likely be much more effective.
Cramer bought into Alder's model and came out in support of its stock when the company's CEO, Randy Schatzman, came on "Mad Money" in June of 2015 and again in January of 2016.
"I was very supportive of the stock when it was a heck of a lot higher, so I definitely need to eat some crow here about Alder. From that last interview through today, Alder's lost 58 percent of its value. Mea culpa!" the "Mad Money" host said. "This is why I try so hard to recommend small-cap biotechs for speculation only, meaning you should only ever buy them with money that you can afford to lose."
Alder's first obstacle was its Phase 3 trial results for its leading migraine drug. While much of the data were favorable, they were also in-line with expectations, causing a selloff in the stock.
Out of the eight analysts covering Alder, only one from Credit Suisse was bearish, but that report, which downgraded the stock to a "neutral" rating and slashed its price target from $30 to $17, seemed responsible for the stock's action.
The report cited a competitive market where rivals' drugs work better, on average, based on clinical data, and those rivals have the capacity to release their treatments sooner than Alder.
Even after rallying on Thursday, Cramer said many bears agree that Alder's shares deserve to trade higher then where they are currently trading.
"I think Alder BioPharmaceuticals sold off too hard in the wake of the data it released two weeks ago," Cramer said. "Migraines are a huge category. I think there's definitely a place for their drug. Even the bears think it could [do] $300 million in annual peak sales, and this is now just a $600 million company. Plus, at these levels, I think that Alder could be a terrific takeover target if the drug works better. I know this stock has burned people on the way down, but it's got a viable drug and we care about where a stock's going on this show, not where it's been. In my view, Alder's been de-risked down here, and I think it's worth speculating on."