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QUICK, sell the NEWS........ oops, TOO LATE

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September 05, 2009 – Comments (7) | RELATED TICKERS: DNDN , SPPI

SELL the NEWS! 

I'm NO ZZ or othe baby biological or pharmaceutical player, but I do enjoy the thrill of the chase.  I've learned a few things of late. I took a nice ride up on Dendreon, but a nice ride down on a few others.  JAZZ is fun right now for the few coins I tossed in.  I recently rode SPPI and reinforced my lesson of why I'm not a "Pharmer".....

Spectrum Pharmacuticals edged up the last two weeks in anticipation of an FDA approval to expand the use of it's core product Zevalin to non-Hodgkin’s lymphoma, a blood cancer.  Previously it was approved for tumors that didn't respond to other treatments. As such, the low medical and market potential for Zevalin was decaying and Spectrum was net negative on their revenue stream. The new potential should help with this.  While FDA approval was not on the calendar until Monday, the Monday holiday and the fact this was a drug extension, allowed the FDA to give an early nod. Spectrum shares had drifted up to just below $10 on the announcement, and quickly popped DOWN!  Extending a drug for a new use is typically the safest of the FDA process cycles to try to ride. The safety concern is already answered,  but you are still left with a decent hurdle on proving effectivity.

The market for Zevalin with it's new approval still didn't rate the $10 PPS for Spectrum.   Spectrum does have other drugs in the pipeline. Mr. Market's speculation of driving up a biopharmaceutical pre-news and dropping it after is rather common on companies with existing product (BDSI, VITA).  Not every new drug will have the market opportunity to quadruple a companies share price.  I suspect Spectrum will get some of the PPS back over time. The new market should hold their revenue stream or maybe even make them an attractive buyout since the big players are constantly looking for smaller fish to keep their coffers fresh, as patents expire. I'm still holding, but wish my itchy trigger had fired at $10 and bought back later. The game of Pharma is a full time job and only the best can swing trade it, and many of them still miss the mark.

 My lesson is the "already priced in".  Although I believe MR. Market is highly inefficient at already priced in. If they were efficient, then why the wild trading swings daily......does a company's value change that much, that fast, (well those that aren't bios or pharma's??)

  In the case of BIOS and Pharma's the POP on the news, (Studies, medical community support, phase i,ii,iii data),  usually fades unless there is revenue attached to the news.  In this case revenue was attached to the news and the price STILL faded immediately.   The lesson here is the Speculators driving the herds.  Who can value what a new drug means to a companies revenue stream. You can guess that if the market is large, the number of drugs for the medical issue few, (or non-existant), and the comany with the discovery is small cap, that an FDA aprpoval can be BIG news and a huge permanent boost of share price.

 If the market is limited, the revenue stream minimal, then sometimes the speculators have the price driven up too much already.  At the pop, they run.  It would be interesting to do a day to day study of how the money moves in the Pharms and BIOS.  Where did the SPPI money go minutes after the news....hmmm JAZZ popped as did a few others? You can almost always find one or two popping with little news on any given day and then dropping. 

 The problem is that the NOVICE gets sucked in and left holding "the bag".  The head scratching and the hair falling when approval is issued and share prices drops must be worse than a Sheepdog in the peak of summer.

 IF you are looking for a Dendreon, then look at the market potential then weigh your risk reward on when to get in.  Get in before the FDA announcement, but be ready for the FDA to push back, turn it down, look for more data, ask about your ability to produce the drug to 99.99999% accuracy, what the shelf life of the drug will be, more data about risk, why patient 76's cousin died just after you gave patient 76 a dose, etc.  NO SURE things. Some non-approvals can be worked through but it takes 6-18 months.  Some result in years of lost time and investments, never to be gotten back.

  Maximum gain, minimal loss, highest risk, long wait time:   Get in when the drug gets good Phase 1 News?   Okay, but wait until after the drop from the POP. Expect to hold it for a year or more, (2 or 3 or 4), expect disappointment. You may lose it all if the company has no other pipeline, but you got in "cheap"

  High gain, moderate loss, High risk:  Get in just after Phase II positive data release.  Less likely to be disappointed, wait until after the drop from the pop, estimate the market and the competition.  Expect to hold for a year or two (or more).

  Moderate Gain, moderate loss, moderate risk:  Get in AFTER Phase III data or a positive peer review article, expect to hold for 6months or more, (perhaps still much more).

  Minimal gain, (depending on the market potential, could still be high)., Maximum loss, minimum/moderate risk (FDA is a fickle creature).  After Phase III data, just before FDA calendar decision, after dueing TONS of due diligence, which is still mostly speculation when you've got the FDA involved.  A denial at Phase III could result in a total loss, but most likely a LONG wait while the FDA gets an itch scratched. Watch the LOW revevnue potential drugs on this one. The price could already be baked in for approval.

 There is no good rules on when to get in.  Early, you pay less, but the wait is long. There are some fast track drugs that address a unique issue. There are also orphan drug status that might get you moving faster. Mileage on both of these still can vary. Other companies could beat you to market. The comany will most likely dilute with addtiional share offerings unless they already have a drug earning revenue.

 At any rate, watch the pops, watch the drops, don't expect a great ride even if you do pick a winner! If the company has NO other drugs and no money, then expect to LOSE All of your investment. If you hit a Dendreon then enjoy, but don't expect all your stars to align, (or even 10% of them)......

TSIF

 

7 Comments – Post Your Own

#1) On September 05, 2009 at 12:10 PM, portefeuille (99.60) wrote:

I don't really care much about those "pops and drops". A gain of a few hundred percent sometimes makes me a "forced seller" though (not short seller). As zzlangerhans has laid out here and I have repeated here the market of "biotech stocks" is highly inefficient. side note: Hans is my fourth first name.

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#2) On September 05, 2009 at 12:12 PM, portefeuille (99.60) wrote:

 

Paul Langerhans

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#3) On September 05, 2009 at 1:34 PM, ResearchLover (< 20) wrote:

I like Exelixis.  They are an example of a company doing the science required to develop early stage therapeutics like PPAR (ant)agonists (can't remember which).  The point is that you have to value the pipeline of companies like that for their potential market (diabetes, weight and metabolism issues, lipid control).  There's always wishful thinking in purchasing something like that.  But then again, dollar cost averaging a small amount every year allows one to accumulate without worrying when and if the next promising candidate will be a winner.  And as long as the company has a strategy to keep stoking its pipeline with high market value candidates, it's that pipeline that is the intrinsic value of the company, that trumps cash burn rate.  And eventually, there should be a winner, a blockbuster.  The next lipitor.  Just accumulate, buy through down markets, delay purchases when there is exuberance, however rational.  That's my pharma strategy that coincides with the strategy of companies like this.  Wishful thinking, harnessed for long term gains.

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#4) On September 05, 2009 at 2:50 PM, ikkyu2 (99.36) wrote:

I really like FBT.  The more I think about it, the more I think equal weight is the right way to trade these names.  Tax-efficient, too.

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#5) On September 05, 2009 at 3:17 PM, TSIF (99.96) wrote:

ikkyu2: FBT really took off on it's HGSI holdings, (8% of the fund). It does look like that by broadening your holding to an ETF that you minimize risk and maximize reward on a blockbuster.  The issue with going long this type of ETF is that these companies are consistantly struggling with getting the next winner in the stable before the current ones lose their protection and go generic. The government needs to make these patents at least 2-3 years longer to justify the risk/reward these companies put out.  Forcing their hand to buy other companies to keep the pipeline fresh will push some of them into making mistakes.   Good luck.

ResearchLover, Exel will need a winner in the next year. Their case burn rate is 2X revenue. It does have a phase 3, a phase 1b/2 and several Phase 1 and strong partners. Good strategy accumulating and not getting swept up in Mr. Market's speculation!

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#6) On September 05, 2009 at 7:14 PM, portefeuille (99.60) wrote:

FBT is based on the AMEX Biotechnology Index (BTK) which is an "equal dollar weighted index", which leads to this result.

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Top 10 Holdings (as of 9/4/2009) Holdings Percent (%) Human Genome Sciences, Inc. 21.44 Affymetrix, Inc. 6.00 Sequenom Inc. 4.94 Nektar Therapeutics 4.75 Myriad Genetics, Inc. 4.51 Alexion Pharmaceuticals, Inc. 4.40 Life Technologies Corp 4.21 Illumina, Inc. 4.16 Biogen Idec Inc. 4.08 OSI Pharmaceuticals, Inc. 4.08

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(from here, emphasis mine)

I think that this index is a little too "passive" ...

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#7) On September 05, 2009 at 8:53 PM, Tastylunch (29.33) wrote:

 "The lesson here is the Speculators driving the herds....The problem is that the NOVICE gets sucked in and left holding "the bag". "

This is why I tend to momentum daytrade these plays instead of getting out in front of it.. I wait till the annoucement then either buy or short in the direction of the news.

Sometimes I'll fade the good news pop in CAPS especially if it's phase II or earlier (e.g. RIGL or another small cap doubles I'll red it day two after the announcment as it will usually correct 10-20% on profit taking)

I'm bit too chicken to actually invest in these guys . I've been burned before. :)

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