A good way to lose your shirt in baby biotechs is to be swayed by a writer or pundit with a strong personal opinion about a company. I've noticed that no matter how good someone's overall track record, and no matter how logical or sensible their argument, they are subject to the same foreboding statistics as anyone else when it comes to these companies. The bottom line is that most will eventually fail.
A good example is Nastech in 2007. The company had a shaky track record in 2006 with FDA rejection of intranasal calcitonin and termination by Merck of a collaboration on intranasal peptide YY for obesity. Nevertheless the pundit of all stock pundits chose Nastech as his small cap biotech of choice for virtually all of 2007. While there's no evidence that Cramer's cheerleading affected the share price, it's certain that a lot of people bought in based on his recommendation. In late 2007 the company flamed out in spectacular fashion and completely abandoned their intranasal drug delivery platform. They're trying to reinvent themselves now as an RNA interference company with the new name of MDRNA, but in these impoverished and skeptical times it's a daunting proposition (as evidenced by their 7M cap).
Similar sequences of events take place on a smaller scale on a regular basis. Even a review of our most highly rated CAPS players will reveal many green thumbs hopelessly and permanently in the red on small cap biotech stocks. The seduction of a good story line doesn't spare even the most sensible investors. [more]
The phase III trial is where many small biotechs finally meet their maker. Phase I safety trials are easily passed as long as the healthy test subjects don't curl up and die, and phase II data can be manipulated and spun positive especially when not placebo controlled. But phase III is a lot more difficult to fudge, which seems to lead some drug developers to hang out in the security of phase I and II as long as humanly possible. A time-honored tactic once the phase III trial is completed and that pre-established endpoint isn't met, is the secondary endpoint or post hoc subset analysis. This is basically a salvage maneuver that attempts to mitigate the trial failure and set up a new phase III trial that will ensure the salaries of the management and board for another two or three years. [more]
In 6/08, Titan Pharmaceuticals looked to me like a good buy. After a couple of years of steady share price deterioration as they advanced their pipeline, three major binary events loomed in the near future. The biggest was the PDUFA for the antipsychotic iloperidone, predominantly a Vanda drug but also a significant royalty prospect for Titan. Next most important was phase III data for the opioid addiction drug probuphine. Finally the company was expecting data from the phase IIb trial of the Parkinson's treatment spheramine. [more]
I'll start with a company no one can defend: Atherogenics filed Chapter 11 just this month, but this was a foreseeable outcome at the end of 2004. Back then the stub traded at a healthy 26 (1.2B cap), despite the release of weak and controversial phase II data on their flagship developmental drug for atherosclerosis, AGI-1067. The company proceeded anyway with a phase III trial (ARISE). In 3/07 the share price had eroded significantly but was still at about 10. Then the ARISE results were negative and the share price was cut in half again. The company performed a post hoc subset analysis on ARISE that appeared to show a beneficial effect of AGI-1067 in diabetics, and behold a new phase III trial was born (ANDES). A surge of optimism based on initiation of ANDES took the price from 1 back to 3, then it plummeted again when late data from ARISE indicated hepatotoxicity at higher doses of AGI-1067. Final data from ANDES in 7/08 was spun positive, but was quickly dissected by the street and found to be weak and insufficient to give a shot at FDA approval. The share price continued to degrade making dilutional financing impractical. Faced with the prospects of a new phase III trial and a mountain of debt, the company decided to throw in the towel. [more]
It doesn't take much to see that most retail biotech investors don't know what they're getting into. A quick scan of CAPS outperform pitches in small cap biotechs will turn up a lot of comments like "Health is good" and "Drug approval this year". It's kind of like buying a lottery ticket with the philosophy of "Money is good" and "I have the lucky numbers". Unsurprisingly most of these picks wind up deep in the red. We can only imagine the devastation in their brokerage accounts. [more]
As Gluteus' share price slowly eroded, Pete tried to forget about his investment knowing that there wasn't likely to be any good news until the phase III trial was completed. Once it got down to 3, however, it seemed to stabilize for a while. From the press releases and the people on Yahoo Finance, Pete guessed it would be another six months before enrollment was completed. Now he was even closer to the explosion in stock price, and the price was only half what it was when he had bought it. If only he'd read that article a year later! But Pete had an idea. If he doubled his original investment, or say bought another seven thousand shares to make it an even ten thousand, the price would only have to go back up to 4 for him to break even. He thought about it a long time but it seemed to make perfect sense. In all likelihood the share price would rise as the phase III data release got closer, and he could even sell at a profit and not have to take a chance on some screw up in the trial. Pete sold off some more mutual funds and bought another seven thousand shares of gluteus just under 3. [more]
For the next few weeks, things were pretty quiet for Gluteus Pharmaceuticals. The stock moved around in a very narrow range, and Pete was impatient for the big move. When was the New York Times or someone really big going to break the story? Anal Insulin was real news! In the meantime he discovered Yahoo Finance and read some more stories about Gluteus. It turns out that they hadn't always focused on Anal Insulin. At various other times, it seemed they had been more interested in anal delivery of other types of drugs. There was an antibiotic, a migraine medication, and even something about a flu vaccine. Strangely enough, Pete couldn't find any mention of those other projects on Gluteus' website. But the company finally seemed to have hit their stride with Anal Insulin. The company had reported strong results from a phase II trial earlier in the year, and that press release had prompted the magazine article Pete had read. Now the company was planning a phase III trial with sites in Turkmenistan, Mongolia, Uruguay, and several other countries. The company was also negotiating for approval of Anal Insulin with the drug regulatory agencies of Laos and Burkina Fasso. Pete figured it would be about a year to get the phase III trial done and maybe another six months before the FDA approved it. After that Gluteus would be off to the races. [more]
Pete was a fairly level-headed, 37 year old guy who had a nice gig as an ICU nurse in a fairly large community hospital. He was good at his work, well-liked, and was reasonably content making about seventy thousand a year. He didn't have a flashy lifestyle, lived with his girlfriend in a modest three bedroom house, and made regular monthly child support payments on behalf of his two young daughters who lived with their mother in another state. He had never been much of an investor except for a rather futile effort in tech stocks in the late 90's, but made annual contributions to his 401K which had accumulated to about a hundred thousand dollars. Although his employer gave him the option of allocating his own investments, he had chosen the default plan which invested his contributions in a mixture of mutual funds and bonds. [more]
Now that I'm flirting with a 99 rating, I feel like I can start writing down some of my thoughts without feeling like a complete idiot. Don't get me wrong - I don't recommend that anyone buy stocks I write favorably about or use my speculations for anything except entertainment. CAPS rankings are virtually meaningless for many reasons (accuracy, red thumbing unshortable bulletin board garbage, keeping long-inactive players in the rankings, etc.). I've been getting creamed just like everyone else in the last couple of weeks, mainly because of an ill-advised decision two weeks ago to liquidate my large holdings of ultrashort ETF's and go hard long into beaten down oil and tech stocks. I was expecting a short upward burst with passage of the bailout bill in the house the first time round, and we all know how that turned out. So I ended up going to cash a couple of days ago and took a huge loss on my two week investments, but right now I'm glad I bit the bullet. At least I've got something left to buy with when this piece of crap finally hits a bottom it can live with. [more]