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Why I'm buying biopharma crap.



June 20, 2013 – Comments (6) | RELATED TICKERS: NUOTQ , MSTX , PTN

Lately it seems that most of the stocks in my database have become overpriced relative to historical valuations. Some might consider these prices justified based on the merits of the individual companies or macro economic factors affecting the biopharma sector. They may be correct, but I have to consider at least the possibility of a developing bubble and limit my exposure. This leaves me a few options regarding my remaining cash reserves.

1. Keep it in cash and stay on the sidelines. Very wise for a retirement strategy but the whole point of my biopharma concentration is to get wealthy before retirement. Cash isn't going to get me there.

2. Short stocks. I've started doing this with mixed results so far. Being deep under water on Acadia has negated my gains on the other five stocks I've shorted.

3. Diversify into cheap spec stocks that have a good chance of going to zero but can also become multibaggers. I've always hated this strategy because it attracts the lowest common denominator of traders who have zero objectivity, do minimal DD, and believe everything management says. In a word, suckers. On the other hand, there are ways for a trader with experience in the sector to optimize his chances of picking a winner rather than going to zero.

No matter how bloated valuations get in the biopharma sectors, there will always be sub-dollar stocks that are existing under the radar. With that in mind, I've recently taken significant positions in Palatin, Mast, and Cytomedix. What I look for in these companies is cash and catalysts. Reverse splits, dilution, and stagnation are death for this strategy. In general, the best time to buy is on a stiff decline after a financing with a defined catalyst within a year's time.

In the case of Cytomedix, a nasty dilutive financing drove the stock down from the 0.70 range to the 0.50 range but the company had 7M in cash as of the end of Q1 and commitments for another 18M which should prevent another sharp decline before the end of the year. Meanwhile, the first interim analysis in the RECOVER-Stroke trial will take place in the near future and barring any nasty surprises may draw some stem cell hypers back to the stock. Topline data is expected in H1 2014.

Keep in mind that I believe the late stage trials in progress for all the companies I have mentioned will fail. Because the stocks trade in the pennies and at low volumes, someone will have to draw attention to the upcoming catalysts to create a run. That person won't be me. I might bet on hype and manipulation, but I won't have any hand in creating it.

6 Comments – Post Your Own

#1) On June 21, 2013 at 1:58 AM, awallejr (38.93) wrote:

When dealing with biopharma in the end it is no guts no glory in my opinion.

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#2) On June 23, 2013 at 3:41 AM, ikkyu2 (98.21) wrote:

Lots of luck.  I'd just as soon go bet the line in Vegas - at least someone will be bringing me drinks.

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#3) On June 26, 2013 at 10:29 AM, constructive (99.96) wrote:

I gave you a rec for good luck, not because I agree with this.

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#4) On July 19, 2013 at 5:27 PM, pchop123 (80.26) wrote:

On your point #3 - - investing in lower priced speculative stocks...  that has always been my forte.  Like you, I studied in the the sciences in college, so I approach lower priced stocks from an analytical perspective first, focusing on all the objective elements I can find.  My business background than enables me really separate out the wheat from the chaf, after that first step.  As an example, if you would like a stellar stock that is going to continue to make very substantial money this year, please check out ITKG.   I would be happy to give you some very saliant reasons why this is the case if you would like to contact me.  Best regards.  PCHOP123

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#5) On November 07, 2013 at 11:40 AM, jcjb59 (< 20) wrote:

@zz and pchop123:  found cellceutix on my own.  New to biotech/pharma stocks but also have a background in science so am facinated with this area. But I really don't have a method to separate the wheat from the chaf.  I would really appreciate any advice either of you could give me.  I am behind on my retirement savings goal, read as much as I can, am mainly in "safe" stocks and also commodities, follow several newsletters...Thanks in advance


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#6) On December 04, 2013 at 1:38 PM, OKwarrior (52.40) wrote:

You should run a screen for value stocks looking for companies w/  market cap < 100 M, (maybe even < 30 M), low debt/equity (<20%), and ideally NCAV < market cap.  There are not many out there right now, but biopharma is one of the few sectors w/ a few.  They are all a crap shoot, but the odds are in your favor if you are patient and you do your due diligence.  

Check out the management. The good ones were in big Pharma and left to join a startup. They will have a good deal of their own money in the company. Some will even have a covenant that future stock offerings will dilute their stock same as yours and mine.  My current FAV is ABIO (big winner today).

 Ben Graham called these "cigar butts". If you collect enough, sooner or later you get a big winner that covers all you other bets.




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