FOOL PLATE SPECIAL: An Investment Opinion
Analysts' short-term thinking tanked two drug makers' stocks this week. While analysts may know something about a business, their buy/sell/hold/scramble recommendations and price targets are as useful as crystal balls and tea leaves. Foolish investors evaluate a business' long-term prospects, ignoring analysts' short-term astrology.
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Long-term investors raked the leaves and watched The Sexiest Bachelor in America contest. (Could you believe Mr. North Dakota? What's up with that airhead?) They paid no attention to the analysts' short-term contortions.
What caused the crashes?
Fool TaysPop exposed this analyst whopper on the MedImmune board, posting excerpts from a news story. Here's Bank of America's Eric Ende, M.D., on September 25 (text bolded by TaysPop):
"Ende noted a paradigm shift within the industry that will allow smaller biotech companies with less capital to be able to compete in drug development. 'New technologies, and a better understanding of the genetic basis of disease, should allow biotech companies to extract greater value from drug development,' he said. 'There will be a reduction in the time, cost and risks of drug development, and a 20-fold increase in the number of potential targets.'
But a week later, Dr. Ende had a change of heart about MedImmune:
"Ende strongly recommends IDEC Pharmaceuticals (Nasdaq: IDPH) for its strong growth potential. He's also partial to Amgen (Nasdaq: AMGN), Genentech (NYSE: DNA), Gilead Sciences (Nasdaq: GILD), and MedImmune (Nasdaq: MEDI).""Nevertheless, Banc of America analyst Eric Ende cut his earnings estimate for the company to 75 cents per share from 86 cents per share in 2001 and to 98 cents from $1.15 in 2002. Rather than earning a previous estimate of $83 million from U.S. Synagis sales in the 2000-2001 season, Banc of America said the company would gain just $47 million and just $87 million in the 2001-2002 season, down from a $140 million prediction. Ende characterized the rest of MedImmune's pipeline as 'early,' saying the company would need to spend a large amount of capital on research and development."
So, one week Ende takes the long-term view that biotech drug makers have an advantage due to a "paradigm shift" (let's kill that one, along with "going forward") granting them efficiency in drug development. A week later: "Did I mention I was off a measly 43% in my estimate of MedImmune's U.S. sales for Synagis?" In a week, MedImmune's pipeline is suddenly "early" and less efficient?
The Banc of America report on Biovail was at least more honest, but no more helpful: "We have lowered our rating on BVF shares to Market Performer (from Buy) based on our belief that the current valuation of the stock has gotten ahead of the underlying fundamentals of the company." Short-term, short-term, short-term.
Look, analysts are people too -- really. They get to change their minds, and like everyone else, they are even misquoted or quoted out of context. But they are not disinterested Anglo Saxon graybeards entertaining evidence and dispassionately judging for the good of investing humanity.
They are looking to generate profits for their firms, whether in investment banking, sales of their firms' inventory stockholdings, or commissions. They are salespeople. And the longer they go on making short-term recommendations, the more often they are wrong. They are not the people to trust with your retirement savings, children's college fund, or, frankly, any money. (Still not convinced? Check out Bill Barker's (TMF Max) explanation and Bill Mann's (TMF Otter) argument.)
One test in this case is a quick check of the MedImmune's drug candidate pipeline.
Is Ende right about the pipeline?
One analyst did pay attention to the pipeline -- a drug company's horde of products in development and human trials hoping for ultimate FDA approval. Robertson Stephens analyst Jay Silverman -- whose reiteration of his "strong buy" recommendation Tuesday probably boosted MedImmune's stock price -- actually stated, "Furthermore, with more than 10 compounds/vaccines in various stages of development, in our view, MEDIs growth rate will be sustained for the long-term." Catch that? "For the long-term." (Oh, and Silverman gets very different figures for MedImmune's U.S. Synagis sales, but I digress.)
Is MedImmune's pipeline "early," compared, to, oh, Dr. Ende's favorite company, IDEC Pharmaceuticals' pipeline?
To find biotech drug company products in clinical trials yourself, click here. Enter the drug company name -- MedImmune -- in the top box and click on SEARCH. Up pops easy-to-follow colored bars telling you the progress of the biotech drug maker's products in human trials prior to seeking FDA approval (the bottom of the website page explains the colors). Now do it for IDEC.
Do you see any difference between MedImmune and IDEC -- either in the number of products or where they are in the process (the more color to the right, the farther along they are)? If anything, MedImmune has more later-stage products in trials. I realize that you can't go by numbers -- that different drugs have different potentials for various markets -- but come on.
Sure, Dr. Ende probably provides more careful analysis for the Banc's higher-paying clients. But you can do it yourself for free on the Internet, and save the aggravation of muddy reasoning, problematic pronouncements, and short-term thinking.
What's a Fool to do?
Easy. New investors can enjoy the 13 Steps to Investing Foolishly. Everyone can learn with fellow Fools on the discussion boards. The goal? Motley Fool Research analyst Zeke Ashton's advice to watch the business, not the stock.
For Fools who want to invest in drug companies -- especially biotech drug makers such as MedImmune -- here's a groovy new Foolish tool: Your favorite Foolish writers and several industry guest experts are teaching The Motley Fool's very first Biotechnology Investing Online Seminar starting October 16. For five weeks, we'll send you 15 lessons designed to help you pick the winners in the exciting world of biotechnology. Click here for more information and to register. Registration closes October 12.
You have analysts too!
Yup, but our Foolish analysts' reports focus only on businesses. You won't see one buy/sell/hold/run-for-the-hills-screaming-naked recommendation, not one single price target. The reports issue quarterly, which is about as often as any investor should check in on a business she has researched before buying. This leaves plenty of time for reading to the kids, taking walks with your spouse, partner or friends, and gazing at blazing fall leaves.
Which all sound mighty fine to me.
Your Turn:
Got a story about analysts? Share it on the Eyes on the Wise board. Interested in MedImmune? Join other Fools talking on the MedImmune discussion board.
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