If you ever needed proof why so many investors – from angels to venture capital firms – steer clear of biotech investing, Tranzyme Pharma provides all you need.

As if the bankruptcy this summer of Biolex (even its website has disappeared) wasn’t a big enough example already. That company washed out, taking $160 million in venture capital down the drain.

Then there are the troubles that have nearly destroyed two Winston-Salem based firms – Targacept and Tengion.

Yes, North Carolina is home to the nation’s third largest biotech cluster.

Yes, the industry is vital to our own health as well as the economic vitality of the state and nation.

But yes, the risks are bigger than big. Despite the life-saving benefits that drug discovery offers, the risks are absolutely enormous for the money players. 

Some angel funds, for example, declare they won’t consider a biotech play. The payback for drug development is too long (years and years), let alone risk. And while there are venture firms in the Triangle that focus largely or exclusively on drug technology such as Pappas Ventures, even big pharma is looking to share drug development risks. Proof of that is Quintiles’ growing business of sharing costs and potential benefits with some of its life science clients. 

Intersouth partners, despite being burned by Biolex, remains a life science player because there are occasional “exits” that prove profitable. Plus, as an Intersouth partner told The Skinny recently, the firm believes in the potential of drugs and their benefits or they wouldn’t invest.

And several startups across North Carolina continue to raise money.

After all, how can you measure the exit value of a drug that enables people to live longer and better lives?

Over the Cliff

But back to Tranzyme – and risks.

Before last Thursday, three Wall Street analysis firms rated RTP-based Tranzyme (Nasdaq: TZYM) a “strong buy.” Two others recommended Trazyme as a “buy.”

They had faith in Tranzyme’s technology and product line. 

Tranzyme Pharma is a late-stage biopharmaceutical company focused on discovering, developing and commercializing novel, mechanism-based therapeutics for the treatment of upper gastrointestinal motility disorders.

Its lead candidate was in two Phase 2 clinical trials. The compound TZP-102 was envisioned as a treatment for diabetes-related stomach paralysis.

Then came the hammer that smashed the stock.

Before the markets opened Thursday, Tranzyme disclosed that TZP-102 failed in one of the trials. The company said the trial “did not meet its primary efficacy endpoint.”

Boom!

The market reaction was nearly instantaneous (see chart with this post).

“Understandably Disappointed”

Tranzyme stock went off the fiscal cliff, plummeting from $3.97 to finish the day at 95 cents.

The plunge continued Friday as shares fell as low as 78 cents. They finished the day at 80 cents.

In two days, shares lost 80 percent of their value.

The company’s market cap went from some $150 million to $20 million.

Hard to believe that the 52-week high for Tranzyme was $5.64.

But the failure of TZP-102 was the second for the firm this year.

Tranzyme officials remain hopeful. 

“We are understandably disappointed with the results of this trial; however, our second Phase 2b trial known as DIGEST is ongoing,” said Tranzyme Chief Executive Officer Vipin Garg in a statement on THursday. “In DIGEST we are evaluating a 10 mg dose of TZP-102 administered three times daily before meals, rather than once daily as in the trial just completed. We anticipate announcing top line results for DIGEST in the first half of 2013,.”

Fortunately, Tranzyme recently raised $10 million through a stock offering – before TZP-102 failed.

In cutting its rating on TZYM to “hold” from “buy,” Canaccord Genuity set a stock target price of $1.50.

However, most ominously, the firm reduced its estimate for TZYM winning drug approval to 10 percent from 40 percent.

If the second test is a failure …