By Dr. George Huang
Most speculators have it all wrong when it comes to biotech trading...
They'll buy biotech stocks ahead of FDA decisions, hoping an approval will bring 100% overnight gains. But more often than not, the market is one step ahead. The stock price will creep up as everyone anticipates good news.
At best, you'll see 10% to 20% gains in most cases. Not bad. But the risk is outrageous: An unexpected rejection will slice 50% to 90% off your shares.
There's a better way to trade these roller-coaster events. A 10-year back study showed this strategy returns 50% annually. Here's what you do...
In short, simply wait for setbacks and buy great companies on the cheap.
This strategy has proved wildly successful over the past 18 months. For example, last June, a biotech called Indevus ran into a regulatory roadblock, and the stock lost 70% of its value. If you held shares, that probably hurt.
But once shares had fallen that far, I figured they were 50% undervalued, even taking the worst-case scenario into account. It was a can't-lose trade. Sure enough, my S and A FDA Report readers cashed out for a 60% gain six months later.
We did the same with Theravance and Viropharma. We pocketed gains of 58% and 44%, respectively, in less than a year as these stocks recovered from brutal FDA rejections.
A few months back, I gave you a handful of stocks to watch for FDA rejections. I was hoping we could pick up a couple on the cheap for similar returns. Miraculously, the FDA approved every single drug on the list. Not a problem. For the strategy to work properly, patience is a must.
And thankfully, there's always a new drug up for FDA approval. Here are the highlights for the next few weeks:
Date Company Drug Target
Oct 19 Amgen (
AMGN) Prolia Osteoporosis
Oct 22 Acorda (
ACOR) Fampridine SR Multiple Sclerosis
Oct 30 GTX (
GTXI) Acapodene Prostate Cancer
Nov 9 Xenoport (
XNPT) XP13512 Restless Leg Syndrome
Nov 13 Cadence (
CADX) Acetavance Pain
Amgen's new osteoporosis drug, Prolia, is up for approval later this month. The biotech behemoth is hoping the twice-yearly injection can reinvigorate its stalling sales (and stock price).
Given a clean bill of health from the FDA, Prolia will become a multibillion-dollar seller and Amgen shares could top $70 by year end – a 15% gain from here. But if Prolia hits a snag, investors will dump Amgen in droves. In that case, we may get to own the largest biotech in the world at a once-in-a-decade price. I'd look to buy below $50.
The remaining decisions on the list will be even bigger stock-moving events. For example, if Acorda, GTX, Xenoport, and Cadence can win approval for their drugs, these tiny biotechs could eventually become profitable. But rejections for any will mean a short-term disaster for shareholders.
I consider all four companies worthy FDA Report candidates at the right price. Each has good management, multiple drugs in the pipeline, and will eventually recover. Circle the decision dates on your calendar... and be on the lookout for deals.
Good investing,
George Huang
