Biotech: The Next Big Bubble? 15 comments
- Andrew Mickey's articles on Seeking Alpha
- Visit: Q1 Publishing
- Subscribe: Prosperity Dispatch
- Andrew's Special Free Report
-
Font Size:
-
Print
- TweetThis
It’s Thanksgiving and the markets are taking a well-deserved break. Frankly, they sure could use it, as the recent volatility is unprecedented.
In the past 25 years, there have been 50 days when the market moved up or down four percent. That seems like an average trading day now. It should. Half of those 50 moves occurred in the past two months. That’s right, 25 years of volatility was crammed into about two months of trading. So, yes, it’s going to be nice to have a long break (don’t worry about Friday, it’s a half day and volume is always light).
What I’m most thankful for is the government taking a day off. So, for at least one day, there are no bailouts. I think they’ve been one of the biggest causes of the recent volatility. Government intervention has created nothing but greater uncertainty in the markets.
Will GM (GM) and Ford (F) be bailed out? Which banks are too big to fail? When will the credit markets return to normal? How deeply will the $9 trillion loss (stocks and real estate values) consumers have taken affect spending this holiday season?
There are a lot of unanswered questions out there, and there will be no meaningful recovery until a lot of them start to be answered. There is a bright side to all of this uncertainty - it gives us time. We have a window here to weed through all the poorly run companies and cherry pick the best opportunities.
That’s why I’m excited to delve into what very well could be the next bubble. The way this market is structured (and you have a good guide to help out), you can make an absolute killing.
It’s true. Yes, even in the worst bear market in 70 years. Here’s how.
Winning in the “Lottery Ticket” Market
The biotech industry is one of the most exciting places to invest (note: exciting investments are usually the worst possible ones to make). There are new drugs discovered, the latest results from a clinical trial can send stocks soaring or plummeting overnight, there’s a lot that can happen…good and bad. Best of all, it didn’t really matter too much which way the market headed.
That’s why I’ve always considered investing in biotech stocks to be like buying a lottery ticket. The payoff is big, but the odds are stacked against you. That all changed a couple years ago when I learned one way to consistently do well in the biotech lottery.
The current bear market hasn’t turned me away from biotech. I’m actually watching it as closely as ever. That’s because the credit crisis and market downturn have created what will be an “unprecedented” opportunity in biotech stocks.
Of course, you have to know which biotech stocks are about to soar and which are about to be crushed. That’s the tough part. However, I’ll show you one surefire way I’ve been able to find the big winners and losers in biotech (it actually only takes a few minutes even if you’ve never been to medical school). I’m talking gains of 60%, 70%, or more in a day.
That’s why, in a minute, I’ll introduce you to the man who has made me an absolute killing in biotech stocks, and look into what he’s “buying” now.
First, I want to make one thing clear. I’m not a doctor. Quite frankly, after visiting a few biotech company web sites, still wonder how a cure for almost every disease hasn’t been developed yet. Some of them are very persuasive and can make believers out of the most skeptical viewer.
I might not be a doctor, but I do know a heck of a good one. And a couple of times each year, he says which biotech stocks are going to soar and which ones are going to plummet…with alarming accuracy.
Why do I listen to someone else when it comes to biotech? It’s simple. His last three contrarian calls have paid off 60%, 70%, and 180%. And I’m just waiting for the next one. Let me explain.
Your Own Winning Ticket in the Biotech Lottery
Remember Dendreon (NASDAQ:DNDN)? Dendreon has been working on a promising prostate cancer drug, Provenge, for a few years. About two years ago when the FDA found Provenge to be “reasonably safe” in its preliminary assessment, Dendreon shares skyrocketed from $5 to $19 in a few short days.
One analyst stood out among the crowd and reiterated his “sell” recommendation on Dendreon, and he even maintained his $1.50 price target on the hottest stock on Wall Street. He had to be a fool - right? After all, the market is always right.
Well, not every time. Within two months of the first announcement, the FDA announced its full opinion on Provenge. The regulators said it “needed more data” before it gave official approval.
For a high-flying biotech stock, any delay is practically a death sentence (just goes to show you – in the markets, high expectations usually lead to big disappointments). Dendreon shares plummeted 60% the day the announcement was made.
He’s not a one trick pony though. Long-time readers of mine will remember when I talked about a small biotech company called Progenics (NASDAQ:PGNX). Progenics was developing Relistor, which is a drug that reduces constipation resulting from taking other drugs. The FDA gave a failing grade to the intravenous version of the Relistor last March. Shares of Progenics plummeted from $13 to less than $5 the day the news released. Wall Street couldn’t unload this one fast enough.
Yet again, this analyst said:
We anticipate the company will … receive approval for subcutaneous [Relistor] in terminally ill patients by [April 30].
He was focused on the subcutaneous version instead of the intravenous. It might seem like a small detail, but the different versions of the drug made a huge difference in a few weeks. About five weeks later, the FDA gave approval of the subcutaneous version of Relistor, and Progenics shares capped off a sharp rebound from less than $5 to $14. The move was good for a 180% gain in a few short weeks.
It doesn’t stop there.
Sangamo Biosciences (NASDAQ:SGMO), a developer of a treatment for nerve damage resulting from diabetes, has been one heck of a ride. Shares had been trading in the $6 to $10 range (a bit volatile, but holding up relatively well). All of that changed on November 11 when the company announced the results from its latest tests and they weren’t very promising.
Sangamo shares shed about 70% of their value as the share price dropped to less than $2 in two days. It was another rout that was unexpected by many. It did prove to be very profitable for a few others because one analyst reiterated his “sell” rating on October 30 and lowered his price target on Sangamo shares well before the bad news was released.
Turning His Work Into Your Money
In each case, it was the same analyst, Dr. Jonathan Aschoff. He’s a doctor turned Wall Street biotech analyst at Brean, Murray, Carret & Co. He has developed an astounding touch when it comes to the volatile, high-risk / high-reward world of biotech.
His track record is impeccable. Aside from the three big wins noted above, he was recognized as the number one biotech analyst in 2007 by Forbes magazine. Still, it seems like nobody listens to him.
I, however, sure do. Had you followed his advice, you could have made 60% shorting Dendreon and 70% shorting Sangamo. You could also have scored 180% buying shares of Progenics when Aschoff said “buy” and Wall Street was dumping shares at any price.
Now, it’s easy to trash Wall Street analysts, and some people have even made careers out of it. However, it’s much more profitable to find a few that are tops in their field and keep an eye on them. In this case, Aschoff has never let me down when making a big contrarian call.
That’s why I’ve been really interested in one of his current “buy” recommendations, Celldex Therapeutics (NASDAQ:CLDX). Celldex is currently developing a brain cancer treatment. Wall Street sentiment is mixed. Aschoff’s sentiment, however, is not. On November 6, Aschoff stated:
Celldex had cash worth $42.70 million at the end of the quarter and is likely to have enough cash to fund its operations until 2010.
In a regular market, I’d start loading up on Celldex. This, however, is not a regular market. A better time to buy is most likely on its way, and here’s why.
“Unprecedented” Time to Invest in Biotech
There are quite a few reasons I’m expecting biotech to be the next big bubble (emphasis on “next” – no sustainable uptrend has started in anything) and to offer the biggest gains in the years ahead. Many biotech stocks will absolutely be slaughtered over the next few months, and it’s all because of the unique nature of the industry.
I’ve got one final word on biotech stocks right now. As you can see, there is everything to love about the sector right now: The developed world, on average, is getting older. The demographics are shifting and demand for new and better drugs will only get stronger over time.
On top of that, the entire sector has been drastically beaten down. Many companies simply can’t get money they need. Over the next few months we’re about to see a lot of partnerships, bankruptcies, and biotech companies doing anything necessary to survive.
Smaller companies in the biotech field need money to survive. Most of them don’t have the cash and aren’t generating any. Eventually, they will have to turn to the public markets to get more financing, and that’s why I’d recommend waiting for the stocks to come to you.
Just take a look at mining and exploration stocks. The bubble bursting in commodity prices has hit them all hard. But it has hit the exploration companies hardest. For example, NovaGold (AMEX:NG) was actively developing a few high-profile properties into mines.
A year ago, shares of NovaGold were trading for more than $20 a piece. Now, after shutting down one major project because costs were too high and announcing they need a cash infusion by the end of the year, shares of the company are trading for about 50 cents. The reason is that there’s a good chance the company won’t get the cash it needs or will have to sell some of its key assets to get the money just to keep the lights on.
The biotech industry is the exact same way. Small biotech companies burn up cash developing new drugs. With the credit markets closed to risky investments, it’s best to start getting a “wish list” of biotech stocks together now because there is a lot more pain ahead.
David Strupp of Canaccord Adams confirmed this:
For the first time in the history of the biotech industry, you’re going to see unprecedented levels of bankruptcies and dissolutions.
Biotech firms simply can’t get the money - They can’t borrow it, and they can’t sell equity in the firm to get it. As a high-risk / high-reward sector, it’s the last to get any attention from a risk-averse investment community. It shows in the numbers.
Biotech IPOs have fallen dramatically with just one tiny $5.8 million deal this year. It’s practically nothing compared to the 28 IPOs in 2007 which attracted $1.7 billion worth of capital. It’s also way down from the dot-com heyday when portfolio managers hungry for risk and newly-minted multimillionaires threw $6.5 billion after 66 biotech IPOs.
It’s getting tough out there in biotech, and for the time being, it’s only going to get tougher.
Traversing a Minefield
The biotech industry will look like a minefield over the next few months. Many cash-strapped biotechs will simply slow down their development of drugs until they can shore up a new source of cash. Others will partner up with a Big Pharma firm (likely, with very favorable terms to the larger partner who will provide necessary funds), a few will surely go bankrupt. There will be a few winners, but a lot more losers until the credit and finance markets are turned around.
Despite it all, one of the big winners can be you. The best thing to do now is remain patient. Celldex may have all the offerings of a big winner in biotech, but there will likely be a chance to get to pick up this speculative company at an even better price.
To borrow a term from the real estate business, the market is a buyer’s market. It’s best to find a few things you like, set an “I’ll buy at” price which is well below a stock’s current price, and then just wait.
Over the next three to four months, some high quality biotech companies will be forced to get more money. Some will get it, and some won’t. Either way, there is a lot of carnage to come in the biotech world over the next few months. I recommend staying on the sidelines for now, and then picking through the rubble in a few months.
In a market like this, patience and prudence will be rewarded…not to mention, much less stressful.
Happy Thanksgiving.
Disclosure: None
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 15 comments:
Wouldn't a better biotech bet be a large company with lots of products, multiple revenue streams, and the cash on hand to acquire startups? Johnson & Johnson is doing quite well, and Eli Lilly recently acquired Imclone for a hefty premium.
October 30, 2008
07:28 EDT SGMO
Sangamo BioSciences-SGMO's cash position is solid, says Cantor
After Sangamo reported in-line EPS, Cantor Fitzgerald still expects the company to keep delivering positive clinical results, and they predict that Sangamo will enter a "substantial" clinical alliance. The firm maintained their Buy rating.
October 29, 2008
16:13 EDT SGMO
theflyonthewall.com: Sangamo BioSciences-SGMO reports Q3 EPS (15c) vs. consensus of (16c)
Reports Q3 revenue $3.75M vs. consensus of $3.98M. :theflyonthewall.com
07:27 EDT SGMO
Sangamo BioSciences-SGMO's data shows the strength of its platform, says Cantor
After Sangamo announced that it found that human T-cells can be made permanently resistant to HIV, Cantor Fitzgerald thinks the announcement shows the strength of the company's platform. The firm believes the shares are undervalued and they reiterated a Buy rating
Certain biotech stocks have lost to date between 90%-95% of it's stock value. But investors see this as opportunity and on the other hand, why then isn't management buying up the stock during this time?
Logic is replaced with GREED!
Your article is precise and clear. But you can't help investors who do not want to be helped. As an investor I appreciate your article and it has only confirmed my exact thoughts. Thank you!
You're going to take advise from someone who commits fraud to try and illegally obtain clinical trial information before final results are released?
Try doing a little research on your souuces next time, unless he's paying you under the table.
That is probably the reason why he was kicked from editor of Breakaway investor at Taipan.
Although reading Andrew Mickeys articles does put some perspective in my mind.
Common Andrew, invest in what you can do best!
I'll wait and see for that to happen...
www.pulitzer.org/archi...
"Friedman Billings analyst Jonathan Aschoff says he was just trying to get the real story when he impersonated a doctor in early March.
"First he sent an e-mail to Dr. Cunningham, the oncologist involved with trials of Genta's experimental cancer drug, requesting a progress update. When it went unanswered, Mr. Aschoff says he telephoned on March 13, posing as a "Dr. Rosen" who had a leukemia patient interested in enrolling in the trial. The alias came from the movie "Fletch," where Chevy Chase pretends to be a doctor by that name, says Mr. Aschoff."
Following is the SEC action in the matter:
In Jonathan Matthew Aschoff (CAF030003/AWC March 2003), Aschoff wanted to issue a research report about a public company for which his member firm was an issuer. Using an assumed name and misrepresenting himself as a medical doctor, he spoke with members of the medical profession in an effort to obtain confidential information about the effect of a drug under development by the company. After being confronted about his deception, he never used the information in a report.
Fined $10,000, and suspended 2 weeks in all capacities.
rrbdlaw.com/Regulatory...
Search on "Aschoff"
It's always good to do your homework and understand the private agendas of those you tout!
Aschoff recommended CEGE and KERX and said they would be approved.
CEGE is at .20 cents. KERX is at .15 cents. Both were trading at roughly $5 when he put those recommendations out.
- A company must have a not very corrupt and so-so quality management
- Clinical trials data in Ph II and, even better, in Ph III must be solid
- Buy these stocks and wait (do not trade)
So far, I have succeeded with ABGX, MLNM, IMCL, Biochem Pharma, Gild. The first four were takenover, and the last did very well. But it took 3-7 years.
There is very few over-night successes in general. Oncology and HIV are the good areas.
How can you tell if management is honest? What are the things you look for?
Thanks.
Jolly Rancher
On Nov 29 03:00 PM nova wrote:
> Biotech investing is quite simple:
> - A company must have a not very corrupt and so-so quality management
>
> - Clinical trials data in Ph II and, even better, in Ph III must
> be solid
> - Buy these stocks and wait (do not trade)
>
> So far, I have succeeded with ABGX, MLNM, IMCL, Biochem Pharma, Gild.
> The first four were takenover, and the last did very well. But it
> took 3-7 years.
>
> There is very few over-night successes in general. Oncology and HIV
> are the good areas.
The article was also way too general. "Having enough cash" is relative to each individual company, the strength and versitility of the drug, and the burn rate. There are tons of opportunities going into the new year because there has been such little buying of the extremely beaten down stocks which could also be exacerbated by tax loss selling. I am expecting a healthy January Effect bounce in some companies, especially those that have already received FDA approval.
There WAS a biotech bubble in December through the 1st week of January, but not for the reasons Mickey states. He probably got lucky on a few stocks, and of course he'll claim it was through shrewd analysis and the teachings of Professor Aschoff, but a chimpanzee could have picked penny biotechs for about 4 weeks there.
Aschoff is a PhD, not a medical doctor, and he's been bashing DNDN for 5 years. No matter what DNDN releases in a PR, Aschoff bashes it, ignoring facts and Data Analysis 101.
When Provenge is approved, I hope Andrew Mickey and "Dr." Aschoff both have DNDN shorted to the gills in an overseas account. Put your money where your mouths are, boys.