Biotech Investors: Be Careful Who You Listen To

Without a doubt, the easiest way to become a better biotech investor is to seek out as many different opinions as you can find on companies and the drugs they're developing.

Just make sure you're careful and question their motivations. Here's a look at some of the key players in the dispersal of information.

Doctors
Why they're important:
They'll be the ones prescribing the drugs. If doctors don't think highly of the drug, it's not likely to get much traction.

But be careful: Doctors are often paid by drug companies to advise them and participate in clinical trials. For instance, in this video, Dr. Jay Skyler touts rapid acting insulins including MannKind's (NASDAQ: MNKD  ) Afrezza and Halozyme Therapeutics' analog insulin PH20. But Skyler is a unpaid scientific advisor for MannKind and has participated in trials testing Halozyme's insulin, so it's hard to say exactly how much credit we should give to his endorsement.

Patients
Why they're important:
Patients taking drugs know firsthand the efficacy and safety they experience. If you look hard enough, you can usually find someone on the Internet who says they're enrolled in the clinical trial testing the drug you're interested in. After a drug is approved, it's even easier to find patients.

But be careful: A couple patients' experiences aren't likely to give a picture of how the drug is performing for all the patients in the trial, which is how the FDA determines if the drug is successful. Arena Pharmaceuticals' (NASDAQ: ARNA  ) Belviq, for instance, caused 10% weight loss in 22% of the patients enrolled in its clinical trials, but the average patient lost just 5.8% of his or her body weight.

There's also the issue of the anonymousness of the Internet. Just because a person claims to be a patient doesn't mean that is true. Investors asked Jenn McNary, whose son is enrolled in Sarepta Therapeutics' (NASDAQ: SRPT  ) phase 2 trial testing its Duchenne muscular dystrophy drug eteplirsen, to prove that her son was actually enrolled. I'm sure she was annoyed by the request, but given the miraculous claims she's making about how eteplirsen has helped her child, investors were right to ask.

Analysts
Why they're important:
Analysts often have access to management that the average investor doesn't. For instance, when Gilead Sciences (NASDAQ: GILD  ) sued Merck a few weeks ago, as a pre-emptive strike asking the court to rule that its hepatitis C drug sofosbuvir didn't infringe on Merck's patents, the news reports I saw were based solely on the lawsuit.

Robyn Karnauskas from Deutsche Bank was able to talk to Gilead's management, confirming that management remains confident that it has sole rights to sofosbuvir and that "Gilead has not engaged in any settlement discussions with Merck."

But be careful: Investment banks make money helping companies raise capital through secondary offerings, producing a conflict of interest. A higher stock price -- fueled by an analyst's bullish opinion -- benefits-helps the biotech raise more capital.

Media
Why they're important:
Articles offer the gamut of new ideas, in-depth coverage, reporting of news, and predictions of upcoming events. Depending on the source they may be opinionated, but even if they're taking the opposite view, it's important to understand the author's thesis. There are always two sides to the story -- after all, every market price is set by a buyer and a seller.

But be careful: We're not always right. Fortunately, opinions are usually easy to identify, so verify the author's thesis as part of your due diligence.

Where investors can run into trouble is opinion masquerading as news. The worst offenders are unnamed sources claiming inside knowledge of the acquisitions. For instance, Bloomberg reported last week that Clovis Oncology (NASDAQ: CLVS  ) was "exploring strategic options including a sale of the company." Investors bought in, sending shares higher until yesterday when Bloomberg announced that the company "hasn't received any interest from buyers."

CLVS Chart

CLVS data by YCharts.

While there's nothing wrong with reporting the news, investors wrongly assume that if a company is getting put on the block, a sale is inevitable. Even when there's another party mentioned, investors should be cautious; it seems like Roche is rumored to be buying a different company each week.

Twitter
Why it's important:
The speed at which Twitter spreads news items and varying opinions make it a one-stop shop for gathering information about the industry.

But be careful: Twitter is only as useful as the people you follow. There's some evidence that people tend to follow pundits who are the most opinionated more than the ones who are most often right.

Read and verify
That's the take-home message.

Now go find an article that confirms or denies my assertion in this piece.

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Read/Post Comments (12) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2013, at 10:50 AM, manipulatethis wrote:

    Investors, be careful of hack internet writers who have a history of making s**t up like the guy who wrote this article.

  • Report this Comment On September 26, 2013, at 10:54 AM, gdm60 wrote:

    It becomes very difficult to take any advice in this blog seriously. the writer of the blog did not take the time when in school to learn how to use English correctly and that there is a difference between "who" and "whom". Sounds like I am nit-picking, but gee whiz, you are purporting to be knowledgeable in the financial area. Why not in the language area -- the thing that binds us all together?

  • Report this Comment On September 26, 2013, at 11:03 AM, AreaRich wrote:

    That is why I decided to try Belviq myself to see if it worked. I did, it does, I have no appetite. But who is going to believe me, and why should I believe you?So really what sense does this article make?

  • Report this Comment On September 26, 2013, at 11:03 AM, RSRdriver wrote:

    WHY ARE YOU SCARING THE MORONS WITH TRUTH AND FACTS?

    Doctors are always swayed by pretty pictures and ignore efficacy, safety and cost!

    The numbers so far are not pointing toward a total rejection by doctors!

    The "doctors" who troll the message boards are only thinking of the public not their call options!

  • Report this Comment On September 26, 2013, at 11:37 AM, RSRdriver wrote:

    The truth just wont go away Areniacs! Keep trying though

  • Report this Comment On September 26, 2013, at 11:41 AM, portefeuille wrote:

    A decent place to start on twitter would be

    https://twitter.com/search?q=%23zzporte&src=hash&f=r...

    and to follow a few of those zzlangerhans and I (and the author :)) are following.

  • Report this Comment On September 26, 2013, at 11:51 AM, EllenBrandtPhD wrote:

    Brian,

    Adam F. at Street.com going Uber-Bullish on SRPT's 96-week results today is going to be huge for the stock, IMO.

    He's been slightly on the fence and now has vaulted over it like a thoroughbred jumper.

    MMs are coaxing the Shorts out very professionally - but soon they're going to be able to force them to cover with a sledgehammer.

    DB's highest in the pack Target raise looks brilliant right now. When we get to that Median Target about 55, other Bullish analysts will want to raise again, taking into account a preemptive possible takeover bid by one of the Big Boyz.

    Wait and see.

  • Report this Comment On September 26, 2013, at 1:32 PM, growingcos wrote:

    Dr. Skyler is a highly respected researcher and a former President of the American Diabetes Association. The fact that he is an UNPAID advisor to Mannkind should tell you something. Would you prefer that people who comment on the technology have no experience with the product? There doesn't seem to be a shortage of those folks. Warning your readers away from experts who actually know something does them (and the doctors) a major disservice.

  • Report this Comment On September 26, 2013, at 4:08 PM, uyutnaya wrote:

    Think You're An Idiot. Very shallow analysis by Brian Orelli.

  • Report this Comment On September 26, 2013, at 5:51 PM, 1yossi1 wrote:

    "Doctors are often paid by drug companies to advise them and participate in clinical trials" -

    So you suggest we should not ask doctors' advice?

    You want to be our health care provider?

    If the FDA approved the drug, and my doc recommends it - you tell me to say NO?

    All docs are corrupt IYO?

    Who pays you Brian?

    If your doc will recommend you one of the "2 Game-Changing Biotechs Revolutionizing the Way We Treat Cancer" - would you also say NO Brian?

  • Report this Comment On September 26, 2013, at 8:50 PM, shaso wrote:

    Nice article about what I am not sure.

    I am a belviq user. Proud to say. I am on my fifth week and I have lost 19.5 lbs so far. I don't expect orelli to believe it but it doesn't matter. My cardiologist didnt want to prescribe, said drug was too new. The bariatric doc tried to get me to take top/phen (generic). His statement was that belviq has low efficacy. He had no experience using belviq. He couldn't believe when he saw that I had lost almost 10 percent of weight after only 4 weeks. Belviq works. Willpower in a bottle.

    So it doesnt matter if someone doesn't believe, I am a believer, I sent a message to Arena Ir, thanking them for this life changing drug. Arena and eisai responded the same day. Oh and one more thing, I am a cardiac patient, took a ekg and did blood work 2nd week on belviq. All normal.

  • Report this Comment On September 26, 2013, at 10:31 PM, plcfischer wrote:

    Disclosure, I am long in ARNA and MNKD. Finding unbiased information is very important and not all that hard.

    First look at the FDA briefing documents and complete response letters if the drug has been or is about to go to FDA AdCom.

    Second the phase 3 study results from http://clinicaltrials.gov. I put this second in order of importance, not in a timeline.

    Third, if as in the case of Belviq the drug is on the market, look at www.drugs.com to see how patients like and respond to the drug.

    Investing in biotech is very time consuming. You need to learn about how each drug works and how it is different from the current, past and proposed treatments. For Belviq, this included knowing that it would not cause heart valve problems such as fenfluramine did and that Afrezza's big advantage is that it is the fastest acting insulin, not that it is inhaled.

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