A few weeks ago, we highlighted development stage biotechnology company Innocoll Holdings PLC (NASDAQ:INNL) as being one to watch as we headed into the middle of the fourth quarter. The company had a couple of key catalysts set to hit the wires over the subsequent month, and both had the potential to dictate medium-term bias in Innocoll’s market capitalization, heading into early 2017 and beyond. Well, the catalysts both hit press at the same time, and things don’t look good for the company – at least, near term.

On November 3, Innocoll announced both data from its phase 3 clinical trials of one of its lead products, designed to improve clinical care in diabetic foot infections, and the numbers weren’t up to par. At the same time, the company put forward an announcement detailing its new drug application (NDA) submission to the FDA for a second lead asset; the second catalyst we covered in our previous review, XARACOLL. The latter of these two is designed to treat postsurgical pain when used as a long-acting anesthetic in the reduction of surgical pain following hernia repair. Data from a pivotal reported early in the year suggested strong efficacy in its indication, and we assumed the application would hit press before November 15, based on the company’s pre-stated early November target. It has done, of course, but markets are focusing more on the former announcement than the latter.

So what does all this mean? Well, first, let’s look at the failed trial.

It was a phase 3 targeting the above-mentioned infection in diabetic foot ulcers, with the asset called COGENZIA. Diabetic foot ulcers, for those not familiar with the condition, are a really nasty side effect of diabetes, and they’re very difficult to treat and will often open to wounds. Just as with the ulcers, these wounds are very difficult to close up, and can often result in infection. The current standard of care dictates a round of systemic antibiotics to reduce the risk of this infection (without protection, these wounds often necessitate amputation) and Innocoll’s COGENZIA is designed to serve alongside the current standard of care as an efficacy adjuvant. On application, it provides high concentrations of an antibiotic called gentamicin directly to the site of the ulcer. Gentamicin, which sells under the brand name Garamycin and is marketed by Merck & Co., Inc. (NYSE:MRK) by way of its 2009 acquisition of Schering-Plough, is a well established standard of care antibiotic, and topical administration should have improved on the current SOC infection rate numbers.

This is a classic case of theory diverging from result, however.

The two phase 3 trials set in place to demonstrate this hypothesis both failed to meet their primary endpoints of statistical significance in improving clinical cure in diabetic foot infections, after 28 days versus either placebo plus SOC or SOC alone. While the company hasn’t made an official statement on the future of the program (or at least one that serves up anything definitive), we would be surprised if it continued, and we expect a near term announcement that COGENZIA is in the gutter.

It is this trial failure that markets have pounced on in terms of their interpretation of both of the latest announcements’ impact on valuation, and the company is down considerably as a result. Across the session prior to the announcement, Innocoll lost 10% of its market capitalization to trade at a $3.50 close. Premarket on Friday, this is different by a further 45%, and the company will open at $1.99 per share.

So what’s next? Well, the fact that these two pivotal trials failed is obviously disappointing, but from a development stage perspective, and with the just submitted application taken into consideration, there is still a pretty robust argument for near term value here.

We think that the company will probably take some further selling pressure during Friday’s session, and perhaps heading into the early stages of next week, but beyond that, as markets get over the implications of the failure, and start to focus on forward-looking programs, Innocoll will probably recover some of its recent lost market capitalization.