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• The Fen-Phen Issue: In 1997, popular weight-loss drug fen-phen was withdrawn amid reports that its caused heart valve disease.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

It will be interesting to see how the FOMC approaches this meeting. The current Fed Funds target rate is 0-0.25%, which in and of itself is rather strange. It is a moving target, not a fixed rate. Who determines which rate is used? My guess is this meeting will be used to clarify what the rate is. The Fed will either officially reduce it to 0% in a continued effort to resuscitate the economy, or lock it in at 0.25%. This would at least leave the Fed with one perceived bullet in the gun.

The rest of the week has a full slate, which starts this morning with the December Existing Home Sales report. Expectations are for a slowdown of 40k units versus the previous month, and I think that is overly optimistic. The housing reports last week both fell flat on their face so I don’t think this report, or the New Home Sales report on Thursday, will come anywhere close to expectations.

Tuesday morning sees the release of the Consumer Confidence report for January, and this one is a tough read for me. It is expected to be the same as the December reading of 38. I am not sure which one will have a bigger impact on the reading: consumers getting excited about a change in leadership, or fearful of more job cuts. I guess it all depends on when the reading was taken.

Earnings:
Mon: AXP, AMGN, CAT, HAL, MCD, TXN
Tues: BMY, DD, GILD, JAVA, YHOO
Wed: PFE, SBUX, WFC
Thurs: MMM, AMZN, CELG, CL, LLY, JNPR,
Fri: CVX, XOM, HON, PG,

Source: Fed Counts Bullets, Earnings Dominate Calendar

There are three entry points in biotech stocks. They are: The first stages of research for a new drug; the initial human trial phases; and immediately before the drug is FDA approved. The later the entry point, the safer the investment.

The stock Marc has his eye on is a late-stage company. It is finishing Phase III trials for a unique cancer treatment drug which, if successful, will corner an entire market.

This from Marc:

The easiest and safest time to invest in a small-cap biotech is after the drug receives approval. However, those investors will obviously not have the same return as those who were willing to take on more risk.

For investors who can afford to stick with the drug approval process, the profits can be life-altering when the drug gets approved and eventually goes on to be a big seller.

For example, investors who sunk $10,000 into Celgene (NASDAQ:CELG) ten years ago have over $1.4 million today.

So how do you grab a piece of the pie?

This is one stock that I am extremely excited about.

So much so, in fact, that I just released an in-depth report on it in my small-cap healthcare investing service, Access.

It’s a late-stage company that I believe is poised to be the next Celgene – the stock that turned investors’ $10,000 into over $1.4 million.

The opportunity is immense. The company is just wrapping up Phase III trials for a cancer treatment that currently has no approved drugs to treat it. Needless to say, if this tiny company is successful, it will have the market to itself.

Even The FDA Wants This One On The Market

What I especially like is the rigorous way that the company designed its Phase II trial, where it ran a randomized double-blind placebo controlled trial. This is not something you see too often in oncology.

Not only that, the results showed that the progression free survival (PFS) rate of all patients taking the drug doubled.  A subset of patients saw their PFS rate quadruple.

This increases my confidence that Phase III will confirm the effectiveness of the drug. Even the FDA wants this drug on the market (assuming it’s safe and effective, of course). The agency has fast-tracked it and granted it “orphan drug status.” This means it will speed up the approval process because of the dire need for the drug and the company will get seven extra years of patent protection.

And to top it all off, the market for this drug is three times the size of Celgene’s. So you can see why I’m so excited about this recommendation.

Here’s How To Invest In This Company

Time is of the essence here. This week, the company is kicking off its road show to institutional investors and getting the story out to the masses. This will surely attract interest. Once institutions get on board, the stock is going to move beyond our recommended price.

Additionally, we’re holding an exclusive, private conference call for Access subscribers, featuring the company’s CEO and a cancer expert. It takes place on Wednesday, September 10 at 2:00 p.m. ET. But in order to be eligible to participate in the call, you must be signed up by midnight on September 6.

For information on Access and this incredible opportunity, please click here.

Source: How To Make Money In The Three Stages Of Biotech Investing

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.

Main Street investors watched helplessly as Regeneron lost nearly $500 million from its market cap in roughly three weeks. Should we just chalk it up to typical biotech volatility?

Actually, scores of hedge funds had anticipated Regeneron’s downward spiral weeks in advance. As I’ll explain, the group took advantage of another biotech “glitch,” sold Regeneron’s shares short, and pocketed a cool 30% return… while naïve investors were blindsided.

Last week, I described the “ivory tower glitch,” which occurs when academic studies shove around biotech stocks. Well, before those studies go public, scientists and researchers often present the data at academic conferences. This unpublished data can sometimes move entire sectors of the industry.

The most famous (or infamous) of medical conferences is ASCO, the annual meeting of the American Society of Clinical Oncology. This is the “Super Bowl” of cancer meetings.

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But ASCO has a dark side, which last year cost Regeneron investors a third of their investment. You see, before every scientific conference, organizers release “abstracts” – one-page appetizers summarizing each presentation. At clinical conferences like ASCO, the abstracts can contain highly anticipated data on new drugs… the kind of information that can move a stock up or down 75% in one day.

Here’s the catch: ASCO has traditionally released abstracts to the public at the beginning of the conference. Yet ASCO members – cancer doctors and researchers who pay annual membership dues – received this information a full three weeks in advance.

Clearly, the scientists on Wall Street’s payroll selectively ignored the Confidential label on ASCO’s abstract books. This data leak created a “glitch”… allowing some investors to trade on “insider” information, while the rest were left in the dark.

In its abstract last year, Regeneron summarized disappointing trial results for its lead cancer drug. Investors who saw this data weeks early had a chance to set up short positions, knowing the market would punish the company. Sure enough, when the public got the bad news, Regeneron’s stock lost 11% in a day and continued to drift lower for weeks.

Regeneron is just one example of dozens of similar ASCO “glitches.” So now, after enduring numerous complaints, ASCO is trying to level the playing field. This year, conference organizers released the 2008 abstracts to everyone all at once… last night at 9:00.

You might want to check them out to see if any of your biotech holdings are presenting at this year’s ASCO meeting. You can bet dozens of volatility-junky hedge-fund managers and analysts are scouring through the pages as you read this, getting ready to make major moves in the market.

If you’re looking for short-term volatility trades, check out the presentations from the usual suspects – big biotech players in the cancer market, including Imclone (IMCL), Genentech (DNA), Onyx (ONXX), Celgene (CELG), Exelixis (EXEL), Medarex (MEDX), and Immunogen (IMGN).

If history is any measure, we’re heading into a span of volatile trading days in biotech. At least this year, we’re all in the same boat.

Good investing,

Rob

P.S. Even with the newly level playing field, it’ll be hard for individual investors to gain an edge over hedge funds when it comes to ASCO. But my friend and colleague Dr. George Huang has developed a system that uses a similar, little-known glitch to generate an average 75% profits a year. Click here to read more about it.

Source: What Hedge-Fund Managers are Reading this Morning