Small cap biotech investments with upcoming FDA catalysts has become one of the hottest new trends, especially due to the fact that it is easy to foresee or expect catalysts based on the use of FDA calendars, and general medical timelines on drug and clinical trials. Unlike other industries where new technologies in research and development are usually kept secret in order to deter competition, the biotech game is wide open as companies publicize their products from the very beginning all the way to marketing approval. This is because biotechs usually need on average $50-75 million dollars from a investigational new drug status all the way to completing phase I, II, and III trials and into marketing, thus they look to maximize their market caps earlier on based on hype in order to fund projects through share offerings.
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While many investors have become wealthy from multi-bagger gains by holding onto companies into PDUFA decisions, the grass isn't always greener on the other side. Such an example was witnessed on February, 1, 2011, where investors of Orexigen got burned by following highly bullish analyst reports, and an FDA panel vote which basically spelled out approval as a cake-walk. To the surprise of many investors, shares dropped 75% in the pre-market once a complete response letter declining marketing approval was received, and interestingly enough, Protalix seems to be following the same path as Orexigen. This is especially apparent when taking a look at the dramatic increase in share Protalix's price leading up to the FDA decision scheduled for February 25, 2011, while taking into consideration short interest, technical analysis and insider transactions.
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There is perhaps no better variable for predicting a company's future outlook than the vote of confidence from one's own management gives through either the purchase or selling of shares. For many investors, both small and large, insider transactions via SEC forms has become almost like a magic 8 ball — providing direction and guidance, more often than not correctly, almost like a guiding light into the direction of the company. Despite this, it has become easy to get trapped in reading reports by mainstream media which concentrate on upcoming potentially positive FDA catalysts, often ignoring red flags such as high short interest, poor looking technicals, and insider transactions.
Orexigen's Fate Through The Eyes Of Insiders and Short Interest
Such a circumstance was seen most recently with shares of Orexigen (NASDAQ:OREX), whom saw its shares explode upwards from $4.50 all the way to a 52-week high of $11.15 almost overnight on a positive FDA panel vote which paved the way for what seemed a seemingly riskless investment into their February 1st PDUFA.