3 Reasons Investors Are Scared of Biotech Stockshttp://www.fool.com/investing/general/2013/03/28/3-reasons-investors-are-scared-of-biotech-stocks.aspx Brian Orelli
March 28, 2013
Biotechs offer the possibility of monster returns. Overnight doubles aren't out of the question. Triples and quadruples as a drug successfully progresses through the clinical trial process are the norm.
And yet many investors shy away from the industry. Let's take a look at why.
Down on bad news
As drugs succeed, they're given a larger value, but that means if a drug subsequently fails, it has a larger effect on the stock price. Phase 1 failures tend to have very little effect on stock prices. Phase 2 hurts a little more, especially for companies with limited pipelines. Drugs that fail in phase 3 are quite costly.
For example, shares of ZIOPHARM Oncology (NASDAQ: ZIOP) were cut by two-thirds this week after its cancer drug palifosfamide failed a phase 3 trial in metastatic soft tissue sarcoma. The smaller phase 2 trial suggested the drug was working, which built up the value of the company. The drug did delay tumor progression by a month, but the increase wasn't statistically significant.
Down on good news
For example, Navidea Biopharmaceuticals (NYSEMKT: NAVB) dropped 12% following the approval of its lymph node diagnostic Lymphoseek this month. The approval was widely expected after an earlier FDA rejection for issues at a third-party manufacturer.
In December, ARIAD Pharmaceuticals (NASDAQ: ARIA) experienced the same issue with a double-digit drop after its leukemia drug Iclusig was approved by the FDA. Strong data and a fast-track designation got the drug approved quickly.
Down on unexpected news
At least with binary events, investors can see it coming. Data from a clinical trial will be released. The FDA will make a decision about whether the drug is approvable. The exact date might not be known, but at least it can be pinpointed to a month or two, with many events coming in a smaller window than that.
But sometimes events come out of left field. And they're almost never the good kind.
Shares of Affymax (NASDAQ: AFFY), for instance, are down more than 90% year to date after the company had to recall all of its red blood cell stimulating drug, Omontys, that treats patients on dialysis with chronic kidney dis