Cart (0)
business newsWhy Biotech Investing Is Not for the Meek
Biotech stocks are driven by catalysts even analysts have trouble predicting the outcomes of, so know your risks.
PRINT
 |
|
(See also, The Basics of Biotech Investing.)
For example, a small biopharmaceutical company called Amicus Therapeutics (FOLD) was having a good day on Thursday as its stock gained more than 15% before midday trading. While this only puts the stock at around $3.50, it could have made you money if you knew to expect it. Amicus’ good fortune came at the expense of its much larger competitor Genzyme (GENZ). The large biotech, which has been grabbing headlines recently due to Sanofi-Aventis (SNY) sniffing at its ankles, filed an SEC filing that stated it could take a year longer than expected to fix the manufacturing issues that have been affecting the supply of its two biggest drugs -- Fabrazyme for Fabry’s disease and Cerezyme for Gaucher’s disease. Amicus’ lead drug is in late-stage testing for the treatment of Fabry’s disease; it also has a candidate in the pipeline for Gaucher’s disease. Many other companies, including Pfizer and Shire Pharmaceuticals (SHPGY), have been trying to grab some of the market share for the two diseases now that Genzyme has dropped the ball on the only treatments available. Genzyme’s problems have created a rare opportunity for companies like Amicus to get a foothold in the market.
While these sometimes huge jumps in biotech stocks can be thrilling, it’s important for investors to remember that the downside of biotechs is that their stocks can fall just as quickly. Investors of Medivation (MDVN) learned this lesson all too quickly this past March. The stock had been flying high on “the next great Alzheimer’s drug,” until that drug, Dimebon, proved to be no better than a sugar pill when tested in late-stage clinical trials. The stock dropped more than 65% in a matter of an afternoon after the results were announced.The immediate repercussions of a drop like this on an investor are obvious, but the ultimate consequences for the company can be even more damning. Many small- to mid-sized biotechs have yet to bring a product to market, and therefore have little-to-no product revenue. This means the failure of a lead drug candidate could force a company out of business.
One company that could be facing this situation is Vivus (VVUS). The biotech has been hot since its lead drug candidate proved to be the most effective of the weight-loss drugs currently trying to get through the FDA. Yet, Vivus stumbled when an FDA advisory committee voted against approval of Qnexa due to safety issues. If Vivus can’t find a way to bring Qnexa to market, the company may have to scramble to survive.
The main lessons of biotech investing are:
1. Do your homework; it’s important to know what drugs a company is depending on, what it has to fall back on, who its competitors are, and when its important catalysts will occur.
2. Act quickly; most of the rises and falls will happen within hours -- don’t wait around once the stock starts to fall or get out once the stock has climbed significantly.
3. Don’t be unwilling to take a risk; remember that these aren’t safe stocks, but the risks are worth the rewards.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
