Why Verastem, Inc. Stock Is Crashing Today

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What happened

Shares of Verastem (NASDAQ: VSTM), a small-cap oncology company, fell as much as 21% on more than four times the stock's normal trading volume today.

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The culprit? Verastem appears to be falling victim to the typical "sell the news" trend that accompanies so many biotechs following their first regulatory approval. On Monday, the company announced that the Food and Drug Administration (FDA) approved Copiktra (duvelisib) as a treatment for adult patients with relapsed or refractory chronic lymphocytic leukemia, small lymphocytic lymphoma, and follicular lymphoma after at least two prior therapies. This approval marks Verastem's entrance into the realm of commercial-stage biotechs.

As of 1:21 p.m. EDT, Verastem's shares were still down 14%.

So what

Before today's pullback, Verastem's stock was up by a monstrous 191% for the year, thanks to the growing optimism among investors that Copiktra would indeed be approved by the FDA. The flip side is that Verastam now has to contend with actually meeting analysts' quarterly sales projections for Copiktra -- a feat that few newly minted commercial biotechs achieve right off the bat. And that's probably a major reason why some investors are ringing the cash register today.

The FDA also tagged the drug's label with a box warning for four fatal or serious toxicities: infections, diarrhea or colitis, cutaneous reactions, and pneumonitis. But the more pressing issue weighing on the stock today is arguably Verastem's lack of experience when it comes to launching a drug.

Now what

Verastem plans on making Copiktra available to patients immediately. That's the good news. The not-so-good news is that this drug is set to go head-to-head against a crowded field of competitors, including Bayer's Aliqopa and Gilead Sciences' Zydelig. That doesn't mean that Verastem can't carve out a profitable niche, but investors may need to be patient with Copiktra's commercial progress.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.