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Ugly lessons from Biotech: False prophets

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October 31, 2008 – Comments (0)

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.

 I'm going to jump ahead and establish Baby Biotech rule #9 in this vein: Do not abandon the previous Biotech rules based solely on a recommendation from an analyst, journalist, pundit, or anyone else. There is no one out there who has a track record in these companies that is worth relying on. Performance in other sectors simply does not extrapolate to biotech.

I believe this leaves me with Rules #6, 7, and 8 to be established. I've decided on Rule #10 which I'll reveal a couple of posts down the road when I review all the Biotech rules that I've derived from the history of Ugly biotechs. I'll then try and identify ten "Bad" biotechs and ten "Good" biotechs based on the Rules. In a year, I'll re-examine those picks to determine if I actually learned anything useful in the last two years or if I'm just kidding myself.

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