Biotechs-Oh So Sexy!
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ah, biotechs! You just want to sidle up to that white labcoat, take off the geeky glasses, ruffle their nerdy hair and say "What's up big boy? A buyout, an FDA approval... hmmm?" But biotechs may be the most volatile of stocks. They seem to trade independently of the market as a whole. If you only looked at biotechs you might not be able to tell if the market was up or down. Owning biotechs can be very much like a passionate affair. Nothing else matters except your darling biotech.
Sexy or Scary
Dendreon (NASDAQ: DNDN) is the absolute best example of this volatility. There are many, many people who held onto Dendreon after it got its FDA approval for Provenge, a revolutionary way to treat prostate cancer by using a patient's own antibodies. And the same holders got killed when it dropped precipitously after questions about whether it would be covered by Medicaid and Medicare. Then that question was resolved in Dendreon's favor and it rose again. Then there were questions about how fast doctors were going to accept using the extrememly expensive treatment, how well could Dendreon execute and how soon would manufacturing go into high gear; and it dived again. The stock is now in the seven dollar range.
Investing in biotechs is mainly a buy the rumor, sell the news process as Arena Pharmaceuticals (NASDAQ: ARNA) stockholders could tell you. There was some controversy over whether its Belviq lorcaserin compound for obesity would be approved by the FDA and it had a great run since May climbing to $13.40 the few minutes after approval. Next day it returned to the nines. And one frightening bear raid took place the Friday before the FDA decision where it dropped from a pre-market high of $11.99 to $7.50. It would have been halted but the bear raid took place in the first five minutes of trading. Arena will probably trade sideways until news of European market approval.
Those who buy a biotech stock are always hoping for the Holy Grail, a 100% premium or more buyout, and it does happen. Inhibitex was purchased by Bristol-Myers earlier this year for more than a double. The Hepatitis C drugs were very hot then. With its lupus treatment, Human Genome Sciences received a buyout offer from its partner Glaxo Smith Kline this spring. So it does happen. If you care to read message boards on biotechs you will see this same hope echoed over and over again.
When trading or investing in biotechs the dangers are high. Just think of the short positions like there have always been for Dendreon and other drugs awaiting a binary type decision. These shorts will trigger bear raid panics and longs will get sold out of positions because of these sudden price fluctuations on rumors. And P/Es are nonexistent even after approvals because the companies have yet to set up marketing strategies and manufacturing venues. Not to mention they don't have yields because every penny is spent on R&D. Lastly, these companies have to burn through cash for aforementioned R&D at a tremendous rate so a secondary offering and its consequent dilution is always a possiblity.
What's Sexy Now
This summer will be volatile for for Vivus (NASDAQ: VVUS) and Orexigen Therapeutics, both makers of obesity pills, Qnexa and Contrave, respectively. Both have run in sympathy with the Arena approval and Vivus will have a FDA approval (or not) decision in mid-July. This is very much a binary event. The science behind this is always a difficult one to parse the FDA's mindset as to risk-benefit ratios. The FDA has already delayed its decision on Vivus' Qnexa once. These two are still quite speculative as Arena was generally considered to have the best side effect profile. Trading will continue to be very volatile in these names as any decision comes closer.
My point being maybe investing in the immature biotech is only for the young and reckless who can still handle a heartbreak. Maybe it's the slow and steady biotechs that have already been approved and have several years of expertise under their belt of marketing and manufacturing that one should marry and have a long term relationship with. Even better is one that has several drugs in their pipeline with patent protection extending for years.
You won't get the rush like that of love at first sight that you will with the unproved bios but then again you won't have to sit in front of a terminal waiting for a trading halt before an FDA decision or the stomach dropping sick feeling if it doesn't go your way. Mind you, I've made money trading biotechs in the past but I was always ready to cut and run if need be and I never cared to hold on after a catalyst.
These speculative stocks just can't be analyzed by normal metrics of margins, sales, or charts. They are catalyst- driven momentum names and should be considered very much like the handsome but potentially heartbreaking "bad boys" they are. Handle with caution.
What's Not to Love
Pfizer has seemed to pull back from the dead as I mentioned in my Sex, Drugs and Rock and Roll Portfolio post http://beta.fool.com/leglamp/2012/06/21/my-sex-drugs-and-rock-and-roll-portfolio/5939/?ticker=PFE&source=eogyholnk0000001. And Bristol Myers has also made some interesting acquisitions to bolster its pipeline and has interesting partnerships with names like Gilead. So what about Gilead Sciences, Inc(NASDAQ: GILD)? It's not a Grandaddy name and it has some maturity but there's still some juice in the name with its pipeline. It just recently submitted a new HIV drug boosting agent, Cobiscistat, to the FDA. It has a 15.42 P/E and is just trading 10% below its 52 week high. At .55 it has half the beta of most of these smaller, more speculative biotechs.
And there's Shire Pharmaceuticals (NASDAQ: SHPG) a name Motley Fool readers probably don't hear too often, but it has a stranglehold on ADD/ADHD medications i.e. Vyvanse, Adderall. It has a slightly higher P/E of 18.54 but it does have a yield just under 1%. The Dublin, Ireland headquartered company has an ongoing campaign to raise awareness of undiagnosed adult ADD and ADHD which could be an expansion of an already large market. The scarcity and demand for ADD/ADHD meds has been mentioned frequently in the news lately and the stock pulled back this week on news of generic competition for its Adderal XR, but they also have a large gastrointestinal division and some orphan drugs in the pipeline. This one has performed nicely in the long term and has been beaten down lately from its 52 week high of $108.79.
Who will you give your heart to? I think you need to assess how much risk can your bear and do your due diligence. Brush up on your science knowlege and realize forewarned is forearmed. Then and only then just give them a little piece of your heart and see what happens.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services recommend Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.