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3 Investment Lessons From Biotech's 2012 Successes

Brian Orelli
December 14, 2012

It's been a pretty good year for biotechs. The iShares Nasdaq Biotechnology Index (NASDAQ: IBB) is up 33% year to date, nearly doubling the broader Nasdaq market that's up 18%. But rather than rejoicing (for too long), investors should try and gleam some investment lessons from the successes in 2012 that they can use to make next year even more profitable.

Try, try, try, try and try again
After four rejections, Discovery Laboratories (NASDAQ: DSCO) finally gained Food and Drug Administration approval for its Surfaxin, its preventative treatment for respiratory distress syndrome. The premature babies that were treated in the pivotal clinical trial supporting the application are now in elementary school.

Obesity-drug makers VIVUS (NASDAQ: VVUS) and Arena Pharmaceuticals (NASDAQ: ARNA) didn't have to wait nearly as long for their approvals, but their tenacity is just as impressive. When their drugs were rejected in 2010, the laundry list of items the FDA wanted addressed before it would approve the drug was daunting. It seemed fairly likely that at least one of the items would trip the companies up on their second time through. Instead, both companies were able to convince the FDA to overlook their warts and approve the drugs.

Investment lesson: Don't write off companies just because the FDA doesn't approve their drug on its first try. Although, be careful, as in the case of Surfaxin, it could be a long wait. Investors that bought after the first rejection may never see a profit.

Drug approved, launch already
Arena hasn't launched its drug yet; it has to wait for the Drug Enforcement Agency to sign off on the potential to abuse Belviq. Shares have suffered as it's waited. Arena hit a high near $12 per share after the approval, but sits 25% lower today. A DEA decision should happen shortly, which would allow its marketing partner Eisai to launch the drug early next year.