by James Brumley | June 20, 2012 9:51 am
This week, I discussed some trading thoughts on Arena Pharmaceuticals (NASDAQ:ARNA) as its weight-loss drug lorcaserin approaches its D-Day with the FDA.
Perhaps you read it. Maybe you even read it and then lined up with pitchforks in hand to skewer me. That’s fine; I’m pretty thick-skinned.
The heated discussion did get me thinking, however. Maybe I could have made my point by showing you how mistimed stock trades based solely on a drug’s approval are nothing new — it’s a reckless pattern traders repeat over and over again. They just switch the tickers out.
Don’t believe it happens? Then buckle up, ‘cause I’m about to show you five high-profile drug approvals that ended up being disastrous for investors that decided to buy into the stock on or shortly after the approval day.
Folotyn is a treatment for T-cell lymphoma, or PTCL. Allos Therapeutics (NASDAQ:ALTH) won FDA approval for the drug back on Sept. 24, 2009. Shares perked up a little bit before the good news was unleashed, but actually started to fade the day before the approval.
The first trading day after Folotyn got the green light we saw some buying, but by the end of the day, ALTH was in the hole 3.5%.
A month later, it was down 30%.
Optimer Pharmaceuticals (NASDAQ:OPTR) was absolutely on fire leading up to the FDA decision date on Dificid. Shares had gained 32% for the year right though the approval date on May 27, 2011. And why not? Dificid is a treatment for Clostridium difficile, which is a severe — sometimes life-threatening — form of diarrhea that is particularly problematic for cancer patients. There’s a real need for a solution here.
Unfortunately, there wasn’t a need for the stock after the drug was approved. OPTR got cut in half within two months.
Working with GlaxoSmithKline (NYSE:GSK), XenoPort (NASDAQ:XNPT) won FDA approval for its restless leg syndrome drug, Horizant, back on April 6, 2011. The stock did jump in a major way that day, and given the fact that XNPT wasn’t already rising headed into the decision, the approval was a surprise.
For the XenoPort die-hards who stuck with XNPT when it didn’t look promising, they made a bundle on the bullish jump. For anyone who waited to buy until the approval became reality, though, there was no profit.
XNPT shares remain under that initial surge price.
Prior to Avanir Pharmaceuticals’ (NASDAQ:AVNR) development of Nuedexta, odds are good most investors had never even heard of pseudobulbar affect (PBA). They sure got to know what it was in 2010, though, given the hysteria behind the drug. To the company’s credit, the stock did soar after the Oct. 29, 2010, approval. Sadly, though, the stock spent the rest of the next four months falling.
Traders who were in the stock before the announcement literally doubled their money on that surge. Traders who were expecting the stock to continue rallying after the drug was approved were sorely disappointed.
Last but certainly not least, the most recent dose of approved-drug pain was doled out by Discovery Laboratories (NASDAQ:DSCO).
I saved the best for last for a reason: I fear what happened with Discovery Labs is most likely what’s apt to happen with Arena. The stock was going hog wild leading up to the March 6 approval of Surfaxin, for the treatment of infant respiratory distress syndrome. The stock opened even higher the next trading day, but it started to move lower that same day (and even closed at the low that day). A month later, it had lost 50% of its value.
Nobody who bought into the stock after the approval has made any money on their trade, but it was all the rage at the time — kind of like Arena is now.
Get the idea? I wasn’t bashing Arena Pharmaceuticals or lorcaserin. I was pointing out the complete disconnect between the company and the stock now that euphoria and speculation have set in. The problem is, we see it all the time … particularly in pharma and biotech.
Is Arena going to be an exception to the norm? That is to say, has ARNA escaped the emotional mania that makes “investing” a bit of a joke? You know, I’d love to say it is indeed an exception. After seeing this story play out time and time again, though, I doubt that it is. I’m sticking with my “buy the rumor, sell the news” theory. You’re more than welcome to stick with your own.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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