Small biotech companies such as Denmark’s Orphazyme (NASDAQ:ORPH) usually have one major product, which pushes them into the spotlight. For ORPH stock, that one product is Arimoclomol.

Arimoclomol is a drug that could treat the rare progressive genetic disorder called Niemann-Pick Disease Type C (NPC). Investors looking for a breakthrough with ORPH stock have been stopped dead in their tracks after a rejection by the Food and Drug Administration (FDA) makes the company’s future look incredibly bleak at this stage.

Arimoclomol is essentially an amplifier of heat-shock protein (HSP) activity that aids patients with NPC. Patients with lysosomal storage disorder have a hard time clearing lipids properly. Hence, the association between HSPs and lysosomes can act as cellular delivery vehicles. However, the benefit for NPC patients in pulling on this lever is very thin.

This is perhaps what led to the FDA rejecting the drug and forcing Orphazyme to re-assess its positioning. ORPH stock has dropped roughly 48% in the past month and it looks like it will continue to lose value for the foreseeable future.

ORPH Stock Hit by Disappointment

The FDA began reviewing Arimoclomol as a potential treatment for NPC back in September. Early signs were encouraging as it received an orphan drug and fast-track designation for the drug. It set a target action date for the drug for June 17 this year. Investors were upbeat about the company’s prospects, especially after the FDA green-lit the controversial Alzheimer’s therapy Aducanumab. They were so upbeat that the company felt compelled to issue a statement on ORPH stock’s extreme volatility in price and trading volume.

However, the study results with Arimoclomol were discouraging, which pointed to a rocky road ahead. In March, the company announced disappointing findings from its 150-patient Phase II/III clinical trial. The study was unable to meet both its primary endpoints to slow down the progression of the disease. Moreover, it was also unsuccessful in improving patient scores on a secondary endpoint.

As a result, the FDA wasn’t accommodative at all and rejected its application. It determined that more evidence was needed to support the drug application. It essentially means that Arimoclomol has a very slim chance of approval, at least for the foreseeable future.

Investors Look to Europe Watchdog for Leeway

Orphazyme finds itself in an extremely challenging situation, where it would most certainly need to run a new pivotal study to satisfy the FDA. A few of its shareholders are hopeful that the European Medicines Agency would give it some leeway. However, until it comes up with some convincing clinical results, it should rule it out having success in Europe either.

Naturally, the fallout from FDA’s decision has had a massive impact on the company’s 2021 outlook. Orphazyme boosted its loss expectations from $16-$24 million to $107-$112 million. It expects to close the year with just $8 million, down from previous estimates of $56 million. Therefore, it’s clear that its cash is drying up, and without the approval of Orphazyme, it has nothing to show for.

It recently announced it was undergoing restructuring, intending to free up resources to pursue a path forward for Arimoclomol. This will include massive cost savings, which will entail a two-thirds reduction in the company’s workforce.

ORPH stock had a lot of momentum behind it, but its hype train has come to a halt after the FDA dismissed its application. It’s now looking to pursue a path forward Arimoclomol, which will be mighty difficult considering its liquidity position. Hence, it looks like a bust at this point, with significantly higher loss expectations this year. Therefore, it’s best to sell ORPH stock.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.