Why I Did Not Recommend Arena Pharmaceuticals

But in a classic example of just how volatile and unpredictable the biotech sector can be, the stock slumped 28% instead. While the news was good on the surface, the problem was that Lorcaserin didn’t help patients lose 5% more of their body weight than placebo. The 5% figure is a guideline that the FDA uses for approvability – and investors punished the stock for not meeting that requirement.

Let’s dig into the story and apply the lessons from it to investing in the biotech sector…

Investing in the Biotech Sector Is Not Easy

Investing in the biotech sector is not easy.

In fact, I’d argue that it requires more due diligence than just about any other sector, simply because of its unpredictable nature and that the science sometimes can’t match people’s hopes for a drug. And when there’s a lot of buzz around an important drug that tackles obesity – one of America’s leading healthcare problems – it can exacerbate the fallout.

Even the very best investors in the biotech space have had stocks blow up on them after bad clinical trial data. It’s part of the business. As I’ve said here before, when you try to capture the potential enormous gains that biotech has to offer, you take on some extra risk.

With Arena Pharmaceuticals, that risk outweighed the reward – and I outlined my reasons why at the Investment U Conference in St. Petersburg, Florida just this past weekend.

How to Find Winners In The Biotech Boom

As I explained in my workshop, “How To Find Winners In The Biotech Boom,” there were a few things about Arena’s story that I found risky…

• Competition: Whenever possible, I like biotech companies with drugs/devices that face little or no competition. But several other companies, including Vivus (Nasdaq: VVUS) and Orexigen Therapeutics (Nasdaq: OREX), have obesity drugs that are in late-stage development. So even if Lorcaserin was effective and Arena had “first mover” advantage, it would likely face competition in the near future.
• Results: In Phase II trials, Vivus’ and Orexigen’s data was stronger than Arena’s. Moreover, Vivus has already shown effectiveness in one Phase III trial. Results from two more are expected this summer.
• The Fen-Phen Issue: In 1997, popular weight-loss drug fen-phen was withdrawn amid reports that its caused heart valve disease. So when Lorcaserin was described as the chemical cousin to the drug, the relationship didn’t sit well with me.

In short, the possible safety issue and the potential for better drugs to enter the market soon meant the reward wasn’t high enough to justify taking on the substantial risk.

And when we’re talking about biotech, avoiding unnecessary risk is critical. You can be sure that if I decide to take on additional risk, you can be sure that the potential reward will be very significant.

Investing in the Biotech Sector: A 5-Step Stock-Picking Method

Before investing in the biotech sector, I use a five-step stock-picking method. Here’s how I pick healthcare and biotech stocks…

When I select companies for my healthcare service, Access, I rely on my F.I.R.S.T. research methodology, which focuses on Financials, Interviews, Research, Safety, and Timing.

I spend a tremendous amount of time separating the companies and stories that merely make interesting reading from those that go one step further and make solid investments.

Many of the companies I recommend are well under-the-radar. Don’t expect to hear them being pumped on CNBC, Internet message boards, or in the mainstream financial press (yet).

Most of them are in what I call the “gathering period” – when influential investors, insiders, and sector specialists are accumulating substantial positions ahead of breakthrough news and/or product announcements.

While these catalysts often lead to short-term share price gains, more importantly, they set the stage for substantial moves higher over the intermediate and longer-term.

Don’t get me wrong… Arena was an appealing story. But there are lots of exciting stories in the biotech sector. And the company failed on a couple of major issues.

When investing in biotech, understand that blowups happen. But also know that it’s a sector capable of producing gains of 10,000% or more. Just ask the investors who bought Amgen (Nasdaq: AMGN), Celgene (Nasdaq: CELG) and Biogen Idec (Nasdaq: BIIB).

Even in this crummy market, Access subscribers are sitting on current gains of 97% (on a position initiated in October) and 23% (in just one month). You just have to know where to look.

Hoping your longs go up and your shorts go down.

Source: Investing in the Biotech Sector: 5 Elements To Consider

Actually, it’s not fear. It’s pure irrationality, as top-quality stocks have been spanked down to bargain-basement levels, despite no discernable change in their businesses.

But business is still booming in the biotech sector…

Over that time, we’ve seen three huge buyouts occur in the Big Pharma/biotech area…

It started in January, with the news that Pfizer (NYSE: PFE) would shell out $68 billion to buy Wyeth (NYSE: WYE).

And things really got rolling this week, with the news that Merck (NYSE: MRK) will acquire Schering-Plough (NYSE: SGP) for $48 billion and that Roche and Genentech (NYSE: DNA) have finally concluded protracted negotiations that will see Roche buy the biotech superpower for $47 billion.

Total value of done deals: $163 billion. And in a market where access to capital has supposedly dried up.

The question is: Could these Big Pharma mergers signal a shift in sentiment and a bottom for the broader stock market?

If you’re looking for a simple, one-word answer… no.

But if you don’t take your investment advice from such in-depth, hard-hitting features as the “Lightning Round,” I invite you to keep reading…

The Credit Is There… But Only For The Right Deal

There’s no doubt that it’s tough to get credit these days. But as the merger deals above show, capital is clearly available for the right deals.

For example, in order to finance its deal with Genentech, Roche issued nearly $33 billion in notes. In addition, Pfizer received over $22 billion in loan commitments from various banks to complete its transaction. And similarly, J.P. Morgan (NYSE: JPM) slapped down $8.5 billion so Merck could fund its deal with Schering-Plough.

Again, this has occurred during one of the most fear and panic-ridden periods in stock market history. And it’s come despite frequent comparisons of the Depression Era. Listen to the media too much and you’d expect to see the world in a grainy, brown hue every time you look out the window.

Don’t get me wrong here: I’m keenly aware that the economy is in bad shape. No one has ever accused me of being a Polyanna. But my point is that it’s not necessarily all doom-and-gloom (as some would like you to believe).

These healthcare/biotech mergers indicate the beginning of a thaw in credit markets and hopefully the start of a healing process for the markets. Notice that I’m not calling it a “bottoming process” because as I said last week, I do believe we’ll see new stock market lows.

But as more deals get done, investor and lender confidence will slowly return to the market. And I do think more acquisitions are imminent – particularly within the biotech sector…

The Biotech Sector – A Wave of Consolidation

The biotech sector is likely in store for a wave of consolidation. While the above-mentioned Big Pharma companies have boosted their pipelines and created massive biopharma companies with their acquisitions, there are still many pharmaceutical companies that desperately need to fill their pipelines.

And that bodes well for biotech – particularly when you consider that the largest biotech company after Genentech is Amgen (Nasdaq: AMGN), which boasts a market cap of $48 billion.

After that, Gilead Sciences (Nasdaq: GILD), which just announced a $1.4 billion takeover of CV Therapeutics (Nasdaq: CVTX), is next at $40 billion. Then the market thins considerably, with only three companies that have market caps over $10 billion and 11 companies with market caps of $1 billion or more.

For example, Merck could buy Biogen (Nasdaq: BIIB) and Genzyme (Nasdaq: GENZ) for less than it cost the firm to buy Schering-Plough.

The point is: Even though the biotech sector has outperformed the S&P 500 during the bear market, many biotech stocks have become cheap.

In fact, pharmaceutical companies wouldn’t even need to raise capital to buy a BioMarin (Nasdaq: BMRN), or Xcelerated Profits Report portfolio member Medivation (Nasdaq: MDVN) and many others like them.

Our 2 Favorite Emotional Friends: Fear And Greed

When managements are scared they hunker down and hang on to capital. But when opportunistic executives add to their businesses – even during downturns – that kind of optimism and activity is healthy. They’re essentially expressing their confidence that conditions will improve.

Remember… emotions control the stock market as much as fundamentals. And as we’ve mentioned in previous columns, fear and greed are the two main players. So when investors see this kind of activity, they start to think about their own opportunities, rather than cowering in the corner in the fetal position like so many have for the past few months.

Big Pharma Falls For Attractive Biotech

As we’ve seen recently, Big Pharma has already fallen for some of the most attractive biotech names. And as some more choice companies begin to get snapped up, you might see a rush into the sector by other Big Pharma firms to grab the existing quality companies before someone else does.

Mix in this momentum with some speculation and that could kick prices higher, causing Big Pharma executives to pull the trigger before valuations get too expensive.

The economy is still bleeding, but these recent acquisitions indicate that the patient is no longer spurting blood all over the emergency room floor. Eventually, it will stabilize and walk on its own again.

When it does, the strongest drug companies will be the ones that took advantage of this unique opportunity to fill their pipelines with products from inexpensive biotech companies.

Source: The Biotech Sector: Big Mergers Could Mean Big Gains For Biotechnology

* Oil prices rallied off a 17-month low yesterday (Wednesday), soaring $5.12, or 8.16% to settle at $67.85 a barrel. Earlier in the day, crude jumped 9% to a session high $68.91 a barrel. Part of the reason for the oil’s rebound was the Energy Information Administration’s weekly report, which showed inventories rose 500,000 barrels last week, less than many analysts expected. Oil prices have fallen by 55% since peaking at $147 a barrel in mid-July.

* Hungary yesterday (Wednesday) secured a $25 billion aid package from the International Monetary Fund, the European Union and the World Bank, The Associated Press reported. According to the terms of the deal The IMF will provide a 17-month standby loan of $15.7 billion, the European Union will make $8.1 billion available, and World Bank will give $1.3 billion in an effort to keep Hungary’s economy from collapsing under the weight of the global financial crisis.

* Procter & Gamble Co. (PG) yesterday (Wednesday) announced a 9% increase in its fiscal first quarter sales. Net income rose to $3.3 billion, or $1.03 per share, up from $3.1 billion, or 92 cents a share, a year earlier, after double digit growth in emerging markets boosted total revenue to $22 billion.

* Qwest Communications International Inc. (Q) yesterday (Wednesday) that it would cut 1,200 jobs or 3% of its work force after third-quarter revenue fell 2% to $3.38 billion. The cuts will come before the end of the year and leave the company with 33,500 employees. Qwest earned $151 million, or 9 cents per share, in the quarter, down 93% from $2.06 billion, or $1.08 per share, a year ago. Though, the 2007 results were bolstered by a $2.1 billion tax benefit.

* The merger between Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) received antitrust clearance yesterday (Wednesday) from the U.S. Department of Justice. The approval paves the way for the merger, which will create the largest airline based on traffic, The Wall Street Journal reported.

* Average airfare for U.S. domestic flights increased 8.1% in the second quarter, the Bureau of Transportation Statistics announced yesterday (Wednesday). The average fare price of $352 is the highest in the 13-years the agency has been tracking the data, surpassing the previous record of $348 set in the first quarter of 2001, Bloomberg News reported.

* Shares of Comcast Corp. (CMCSA) slumped almost 9% yesterday (Wednesday) as the company announced it lost 147,000 cable subscribers in the third quarter due to weak economic conditions, Reuters reported. Comcast shares lost $1.68 each to close at $15.28.

* Shares of biotech firm Biogen Idec Inc. (BIIB) plunged more than 11% in after hours trading yesterday (Wednesday) after the company announced a participant in a drug trial for its multiple sclerosis drug Tysabri had been diagnosed with a life-threatening brain illness. The patient had received 14 infusions of the MS drug and was diagnosed with progressive multifocal leukoencephalopathy, or PML, Biogen said today in a regulatory filing, Bloomberg News reported.

Source: Global Investing Roundups Thursday, October 30th, 2008

Phase 1 Investor editor Rob Fannon recently wrote that biotech was one of the few market sectors to show positive returns as  many other stocks were getting hammered. He sees great values in the sector.

There’s a good reason for this strength. A struggling economy won’t hurt biotech and medical as much as, say, an automaker, retailer, or restaurant chain… And biotech is one of the few industries showing solid sales growth.

A big holding in the S&P Biotech ETF, Gilead Sciences, just reported a 22% increase in quarterly sales growth. A slew of big biotech players report earnings next week, and I expect more great numbers.

Several ETFs give you broad exposure to biotech. Just enter “biotech” in the search box on www.etfconnect.com for a full list of funds. (A warning on the HOLDRs Biotech ETF – I’d avoid it… It’s ridiculously weighted toward just four high-profile companies.)

The really huge gains in biotech will be made with the best individual companies. Pick the right one and you could easily multiply your money by four or five times.

Today, Steve Sjuggerud of Daily Wealth calls biotech, the first “screaming buy” of 2008.

I asked Rob about the Genentech buyout offer from Roche – the one that I called the “catalyst” for the sector back in July.

Rob said the Genentech bid “is a bad move for Roche… but it’s terrific for the industry, for a couple reasons.”

• First, big, profitable biotech companies like Biogen (BIIB), Gilead (GILD), Genzyme (GENZ), or Celgene (CELG) are perceived as safer ways to play biotech. Like Genentech, these companies already have drugs on the market that command premium pricing and offer multiple years of remaining patent protection. They could be takeover candidates as well.

• Second, once Genentech is acquired, $40 billion of money dedicated to biotech will need to find a new home. Investors will search for new spots to park this cash… We’re seeing it already. Sector valuations are already on the rise.

According to Rob, the whole sector “is prone to swift surges of joy.” An easy and diversified way to own biotech is through the SPDR biotech ETF (XBI). It holds mostly mid- and large-cap companies.

But Rob says the real money will be made in small-cap biotechs – like the ones he often features in his newsletter. He told his readers, “I’m betting the entire small-cap space could jump as high as 25% in the coming months. And that could be just the beginning…”

I trust Rob, who’s finally bullish about biotech. Everything is lined up, as far as our “cheap, hated, uptrend” mantra goes. And the sector has just begun to rise. You haven’t missed a thing.

In short, if you haven’t bought biotech yet, buy it now! It’s the first “screaming buy” of 2008.

Likewise, Jim Nelson in the Penny Sleuth sees great profit opportunities for biotech right now.

You see, investors have been too busy buying up investment banks and mortgage fiascos. Now that the dust is starting to settle (even though we expect that to take quite a while), more and more interest is being paid to technologies and biotechs. That hasn’t happened on any large scale since the tech bubble burst.

A few weeks ago, Big Pharma went head first into this recent breakout, when Switzerland-based Roche Holdings offered to buy up the other 44% of Genetech Inc. (NYSE:DNA) that it didn’t own. The news of this possible deal sent shares flying 15% overnight.

Just a few days ago, Bristol-Myers Squibb (NYSE:BMY) offered to buy ImClone Systems (NASDAQ:IMCL) — a small $5 billion biotech — for $60 per share. While that one was instantly rejected it did send ImClone shares flying, giving investors a nice, one-day 40% gain.

These stories are starting to roll in now.

Genetech has formed a special committee of independent directors to evaluate the $89-a-share acquisition offer from Roche, which already owns 56 percent of the US biotech firm.

If the deal does go through it may be bad news for Roche and Genentech shareholders, according to Phase 1 Investor editor Rob Fannon in The Growth Stock Wire. But it would be good news for the biotech industry as a whole…

While I believe the bid is a bad move for Roche – and not a great proposal for Genentech shareholders – this mega-deal is actually good for the entire biotech industry… and its investors.

With Genentech gone, the top of the biotech food chain is empty. Many investors will be searching for new spots to park their biotech cash. And sector valuations are on the rise. Both major biotech indexes – the Nasdaq Biotech Index and AMEX Biotech Index – are up more than 7% in just a few weeks.

Small-cap biotechs are cheap right now. So I’d be willing to bet the sector could jump 25% or more in the coming months. And big-cap names like Biogen (NASDAQ:BIIB), Genzyme (NASDAQ:GENZ), and Elan (NYSE:ELN) have jumped to the top of Big Pharma’s short list of buyout candidates.

If you’re thinking of dabbling in the biotech sector, Roche’s bid for Genentech just may be the buy signal you’re waiting for.

Source: The Buy Signal You’ve Waited For