Plenty of investor interest has been placed on the prospects of young biotech companies. Many of these budding firms have a good portion of their businesses riding on the outcomes of The Food and Drug Administration [FDA] approval decisions for their newly developed drugs. The drugs in question have the ability to improve and/or extend the lives of individuals.
Since most of these companies have a lot riding on the FDA approval decisions, the stocks are sensitive to any positive or negative news regarding the pending drugs. The stocks have a tendency to climb higher as the FDA decision date approaches. The stocks will typically spike higher on the news of the approval or drop sharply lower on news that the drug has been rejected.
Here is a list of the upcoming FDA approval decision dates for Q1 2013:
immunization against infection caused by all known subtypes of hepatitis B virus in adults aged 18 to 70
moderate to severe chronic pain
AP Pharma Inc.
prevention of acute- and delayed-onset chemotherapy-induced nausea and vomiting
Impax Laboratories (NASDAQ:IPXL) is a well-established company with over 100 drugs on the market. Therefore, the approval or rejection of its drug, Rytary, will not have as dramatic an impact on the stock price as compared to the other companies. Impax is a solid lower risk investment over the others as well. The company is undervalued with a PEG ratio of 0.63 and a price to book ratio of 2.09. It is expected to grow earnings annually at 19.04% for the next five years.
Pharmaxis (OTCPK:PXSLY) has one drug already on the market: Aridol, a lung function test that allows doctors to diagnose and manage asthma. Zogenix (NASDAQ:ZGNX) also has a drug on the market: Sumavel DosePro, a delivery system that provides needle-free subcutaneous administration of sumatriptan for migraine and cluster headache. Although Pharmaxis and Zogenix have one commercial drug on the market each, the pending FDA decisions for their newer drugs should still have a significant impact on their stock prices.
Dynavax (NASDAQ:DVAX), Immunogen (NASDAQ:IMGN), and AP Pharma (APPA) all have their first potential marketable drugs in the hands of the FDA. These four companies have the most risk at stake with the upcoming FDA decisions as their potential to earn revenue and earnings in the near term depends on the pending approvals.
The more conservative investor with an interest in biotech could consider buying Impax among this list of companies as it has a large amount of drugs already on the market and takes on the least amount of risk. The approval of Rytary may not have a profound impact on the stock price, but the company would make a good long-term investment.
For those who are looking for more of a risk/reward situation, any of the other six companies could be bought ahead of the FDA decision date. Although there are no guarantees, the stock prices tend to rise in the months leading up to the decision date. However, negative news from the FDA could happen before the decision date. Sometimes the decision date is postponed to a later time. This could be because the FDA wants to perform more studies to ensure patient safety. That would most likely cause a drop in the stock price, which is the risk of owning any of the young companies. Also keep in mind that FDA approvals occasionally occur before the stated decision date - so you'll want to watch the stock closely.
The alternative strategy is to wait until the news of the FDA approval, and short the stock after it spikes higher. The logic behind this strategy is that many holders of the stock will sell to lock in the gains on the news of the approval. This causes the stock to drift lower in the days following the approval. The drop in price may be about 5% - 10%, which is enough to make a quick buck. I would recommend using put options for this strategy so that your downside risk is defined. After your order is filled, immediately put in a limit order to close the position for a 5% - 10% gain or at a level that you are comfortable with.
Normally, I'm an advocator of buying and holding for the long-term. However, I know that a few short-term trades can add some excitement to your portfolio. Just be sure to view the short-term trades as using 'play money' that you would otherwise take to the casino and expect to lose. If the trade doesn't go your way, you won't lose too much, but you'll still have fun in the process of possibly winning. Perhaps, you'll hit the jackpot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.