A Look Inside the Biotech Haunted House

Are you willing to step inside the biotech haunted house? It's a scary place full of the ghosts of failed biotechs past like Large Scale Biology and Targeted Genetics. It's a house full of stocks not suitable for the faint of heart, as unseen dangers and hobgoblins lurk around every corner.

Even after being warned of the risks, if you're still brave enough to come inside the biotech haunted house, please realize that there are surprises along every dark corridor. For example, the unpredictable U.S. Food and Drug Administration will spook investors with calls for more clinical trials on drugs that appear to be a lock for approval like Encysive's (NASDAQ:ENCY) Thelin, or drugs may be pulled from the market (at least temporarily) for showing signs of rare side effects, like with Elan's Tysabri last year.

As you enter the biotech haunted house, you must have a strong stomach for volatility and be prepared to see pools of blood and guts all over the walls when shares of biotechs drop 50% or more in one day on clinical trial failures, like what happened to Renovis last week when its only drug failed phase 3 trials, or when Neurocrine Biosciences (NASDAQ:NBIX) failed to gain regulatory approval for its insomnia drug, Indiplon.

The house is also full of biotech zombies. Should you ever come across any of these, run the other way as fast as you can! These zombies like Biosante Pharmaceuticals (AMEX:BPA) or Titan Pharma have been running around for years on the hopes and dreams of a few investors after multiple failed clinical trials and have little chance of bringing quality drugs to the market. If you approach these zombies, be prepared for disappointment and share price pain.

Also, be very careful if you happen to stumble upon some of the witches of industry concocting their potions in the kitchen. Biotechs like Arena Pharmaceuticals or Exelixis (NASDAQ:EXEL) cast spells of future blockbuster drugs over investor's eyes and can blind them to the clinical, regulatory, and competitive risks that these companies face, even though they do have multiple promising drug candidates in clinical trials.

Try not to get attacked by spiders in some of the large, sticky webs of unproven science that are all over the windows of the biotech house. Getting caught up in the web of some of the companies developing cancer vaccines like Cell Genesys (NASDAQ:CEGE) or antisense drugs like Genta (NASDAQ:GNTA) might end with you getting bitten, and there's no known cure for the poisonous bite of portfolio losses.

And whatever you do, don't ever go into the attic of the biotech house, because that's where the vampires hide, just waiting to feed on the blood of investors. These vampires sneak up and then attack with shareholder lawsuits when drugs fail clinical trials and share prices shrink. Or as the case with Wyeth's (NYSE:WYE) hormone drug Prempro shows, they'll try to suck money out of the company by making far-fetched claims that the company should have known about all the potential side effects of a drug.

There are lots of ways to get seriously injured inside the biotech house of potential horrors. Fortunately, with the wisdom of biotech ghostbusters like Charly Travers and Karl Thiel, the Motley Fool Rule Breakers newsletter service can help investors find biotech's winners and avoid the pitfalls that so many investors encounter when they enter this ghoulish house.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article.

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