A 76% gain in one day? 140% in two? Only in the world of biotech. Those are the returns Keryx Biopharmaceuticals (NASDAQ:KERX) posted Monday and followed up with Tuesday morning, leading to a total advance of 225% for the last month, all stemming from measurable success — not even an FDA approval, mind you — for the company’s one and only drug in the pipeline.
Like I said, only a biotech stock.
I just hope you took advantage of the surge and used it as a chance to lock in a nice gain, ‘cause it was one of those one-in-a-thousand victories. But, regardless of whether you were in and whether you got out, the surge from Keryx is the perfect opportunity to re-teach a critical lesson when it comes to “investing” in biotech stocks.
We’ve Seen This Too Many Times
I know I’ll be considered a wet blanket for being anything but bullish on KERX shares right now. After all, years of drug development were just vindicated, and the stock is skyrocketing. What in the world could possibly be wrong with owning Keryx?
It’s a sentiment (in terms of depth as well as breadth) that I’ve seen too many times … right before a major meltdown for a stock.
Examples are numerous; two of them were recent. Remember how bullish the market was on Arena Pharmaceuticals (NASDAQ:ARNA) leading up to the approval date for its lorcaserin/Belviq weight-loss drug? The stock soared more than 600% between March of last year and June 27, when the FDA finally cleared the drug for sale in the United States. For some, it was the final piece of the puzzle they needed to see laid before jumping in. For those same traders, it’s also been a nightmare ever since. Arena shares peaked that day, and still are 36% beneath that peak price.
So much for stepping in on good news.
Vivus (NASDAQ:VVUS) is the other recent example/reminder. It won FDA approval for its weight-loss drug, Qsymia, after the market closed on July 17 of last year. The stock peaked the next day at $31.21, and is presently at $12.33 … 60% beneath its post-approval peak. I have no doubt that at least some investors waited until July 18 before getting in and have ridden the stock all the way down — perhaps a little shell-shocked that things could turn so sour so quickly.
And no, Vivus and Arena weren’t just a couple of isolated incidents that just happened to be in the wrong place at the wrong time. I documented five more relatively recent examples of post-news meltdowns back in June, including major pullbacks from Optimer Pharmaceuticals (NASDAQ:OPTR) right after Dificid was approved, and a huge dip from Discovery Laboratories (NASDAQ:DSCO) immediately after Surfaxin got the FDA’s nod of approval.
I know what you’re probably thinking: The Keryx Biopharmaceuticals news wasn’t an FDA approval, but rather, a successful conclusion to its Phase 3 trial of as a treatment for hyperphosphatemia in dialysis patients. So, it’s not going to suffer the same fate as DSCO, ARNA, OPTR or VVUS.
Respectfully, the approval (or lack thereof) isn’t the problem. The problem is when extreme hype pumps up a stock — that hype can never last.
Nobody would love to see faithful owners of KERX continue to be rewarded with more gains from the stock than I would. Unfortunately, I’ve been to this rodeo too many times to assume anything other than a significant pullback is in the cards.
See, in a perfect world, a stock trades at what’s perceived as a plausible, forward-looking fundamental value. We don’t live or trade in a perfect world, though. In the real world, that “plausible, forward-looking fundamental value” is a moving target at best. And when you’re talking about biotech, that moving target becomes a “possible, distant-future value” moving target. It’s a target that’s based on equations with more unknowns than knowns, and where the media and amateur traders fill in those blanks themselves … usually with a lot of optimism.
Like I said, though, optimism (hype) can’t last forever, and when it fades, it usually fades fast.
The lesson? Biotech investing isn’t “investing” at all. I’d be hesitant to even call it “trading.” Playing biotech stocks is glorified guessing.
There’s nothing wrong with that, but if that is indeed going to be the game, then you have to play it as such — get in, get out, and don’t dawdle. Follow the growing whispers with new trends, then trade against the crowd when trends start to age. (That applies bullishly as well as bearishly.) Understand that what the crowd thinks is far more important than what the company says, and when the crowd is most certain they’re right, that’s generally the time to be a contrarian.
Oh, and here’s a reality check for you: If you really care whether a particular drug is approved or not, you’re not just playing the game — the game is playing you.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.