Making money on biotechs is easy. You just need to work at the Food and Drug Administration, have high school friends that work at a biotech company, or just pay a doctor working on a clinical trial for the information.
It'll also get you sent to jail. Don't try this at home.
This week, executives from Celgene (Nasdaq: CELG ) , Sanofi (NYSE: SNY ) , and Stryker (NYSE: SYK ) were charged along with their accomplices, some of which were high school friends, for passing along non-public information.
The defendants allegedly traded ahead of six different earnings announcements by Celgene, and before the company withdrew its application to expand the use of Revlimid in Europe. But these are big companies, making it hard to make substantial gains. The European withdraw, for instance, only sent shares of Celgene down 12%.
Fortunately for the inside traders, each company made purchases of smaller companies at substantial premiums. The defendants reportedly bought shares of Chattem, which was purchased by Sanofi, Abraxis BioScience that Celgene purchased, and Orthovita before Stryker purchased it. Chattem, for instance, was taken out for a 34% premium.
In a separate insider-trading case, the government charged a hedge fund manager for selling shares of Elan (NYSE: ELN ) after he was tipped off by a member of the Safety Monitoring Committee for the trial testing the company's Alzheimer's drug bapineuzumab that it was developing with Wyeth, now part of Pfizer (NYSE: PFE ) .
Doctors are routinely hired by hedge funds to give their expert opinion, but that's all they're supposed to give. Non-public information is supposed to be off limits.
Of course, greed being what it is -- and the fact that it's really hard to prove insider trading -- means doctors could be slipping large investors data often. It's nice to see at least some of them getting caught.
While it certainly isn't fair for some people to have an inside advantage, the good news for investors is that it doesn't substantially affect your investments. A drug is either going to succeed or it's going to fail, and whether someone else has inside information isn't going to change that. Investors should cheer when those that break the rules go to jail, but it makes more sense to expend your energy doing due diligence rather than worrying about insider trading. Investing in biotechs (legally) is hard work.
While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.