The End of the Biotech Rally

by: R. Scott Raynovich

The risks in the biotech market were evident on Wednesday as Medivation (NASDAQ:MDVN) crashed after releasing disappointing Phase III results for its Alzheimer drug, known as dimebon, saying that the drug was ineffective in treating cognitive decline or behavioral disorders. The stock plunged 67% to 13 on Wednesday. In a joint release, Medivation and its partner Pfizer (NYSE:PFE) said its two Phase III trials did not meet its co-primary or secondary efficacy endpoints compared to placebo.

Our partner Raygent Associates, which has been following these developments, points out that Alzheimer Disease (AD), "has proven to be one of the most difficult challenges for healthcare," with over 5 milliion individuals affected and estimated costs more than $600 billion. Drugs currently on the market have had minimal effectiveness.

The news comes at an interesting time, following an enormous one-month biotech rally, especially in the small-cap and diagnostics stocks we've been telling you about. On February 18th, we told you why the Rayno Report was bullish on diagnostics. I guess we weren't bullish enough, as the life sciences and biotech markets have taken off in the last month, with many of the picks up big in less than a month. Here's just an example of what we saw in the last 20 days:

Sequenom (NASDAQ:SQNM): Up 50%. Holy cow! Why didn't we bet the ranch (cause the wife won't let us -- and we don't own a ranch).

Genomic Health (NASDAQ:GHDX): Up 9%. Not bad.

Qiagen (NASDAQ:QGEN): Up 5%. Okay, so not as impressive.

SeraCare (NASDAQ:SRLS): Up 0%. Okay, not impressive at all.

IBB ETF (NASDAQ:IBB): up 8%. A general biotech rally clearly took hold.

What to do now? Clearly the Medivation news shows you what can happen when the biotechs disappoint.

The bottom line: if you happened to wander into any of the biotech stocks, especially SQNM, in the last month, maybe it's time to book some of those large gains. But clearly biotech and diagnostics continue to be in bull mode and should be held in some amount in diversified portfolios.

Disclosure: No positions