Sometimes investors' reactions puzzle me. Feeding off of just a single piece of information, shareholders can cause wild swings in share prices.
Sounds like opportunity knocking to me.
Take a look at how these two drugmakers have fared over the past week:
Increase (Decrease) So Far This Month
Source: Yahoo! Finance.
They're both cash-burning drug developers, so based on their share price change, you'd think that Dendreon had released positive data and Amylin's drug had flopped. Nope, not even close.
Dendreon's rapid appreciation appears to be because the American Urological Association gave the company time on April 28 to present data at its annual meeting. The company had already said in January that the data from the final trial for its prostate cancer treatment, Provenge, would be available in April, so the timing shouldn't have surprised anyone.
Giving the company time to talk at the conference isn't an indication that the trial was successful. Drug companies are increasingly presenting negative results -- Eli Lilly
Investing in drug developers is about estimating the chance of clinical trial success or approval by the Food and Drug Administration and then making sure you're being rewarded accordingly for taking on that risk. As Dendreon increases in price, the potential reward from a positive result decreases, and there's no clear sign that the risk of failure has gone down.
I see that as a sign to sell -- or at least to trim your holdings. You'll miss out on a huge increase if the results are positive, but holding on for that potential looks like a big risk to me.
Shades of gray
Amylin's share price fall didn't have anything to do with its drug directly, and while recent news did add some risk to the potential for an FDA approval of its once-weekly Byetta, it seems like investors have overreacted.
Last Thursday, an FDA advisory panel deadlocked over whether thyroid cancer seen in rats and mice given Novo Nordisk's
The lack of a ringing endorsement from the panel of experts lowered the likelihood of approval of liraglutide, but the side-effect profile isn't identical for the two drugs, and the panel's vote doesn't hurt once-weekly Byetta as much as it does liraglutide. While thyroid cancer in liraglutide was seen in male and female rats and mice at levels equivalent to what a patient would take, thyroid tumors were seen only in female rats given once-weekly Byetta at doses corresponding to more than three times what a patient would take.
There is no doubt that the cancer data adds risk of a FDA delay for once-weekly Byetta, but I don't think it's as dramatic as investors have made it out to be. This drug has the potential to be a blockbuster if it makes it onto the market and investors will be rewarded handsomely from this level if it does.
Value or value trap
The secret to knowing whether the dramatic rise or fall in a stock is a signal to buy or sell is to understand the company in and out. Whether it's drugmakers, financial companies like Citigroup
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Fool contributor Brian Orelli, Ph.D., loves high-growth companies, but he doesn't like to overpay for them. He doesn't own shares of any company mentioned in this article. Novo Nordisk is a Motley Fool Global Gains recommendation. Seeing the Fool's disclosure policy is cheap, just click here.