My Brilliant Biotech Move for 2012

by James Brumley | November 14, 2012 6:15 am

Being a financial/market journalist has made me a better investor, and vice versa. I’m privileged enough to get paid to dissect what the markets and individual companies are doing, and though I’m prohibited from trading the stocks I write about, the nature of the work has allowed me to rack up a ton of practical wisdom when it comes to stock-picking.

Sometimes, though, the nature of the work can obscure the fact that nine times out of 10, simpler is better … and by better, I mean more profitable.

Case in point: 2012’s love affair with the biotech industry.

What a Year!

Even long-tenured biotech traders will agree that 2012 has been an especially busy year for the industry, though it actually got started in late 2011 when Bristol-Myers Squibb (NYSE:BMY[1]) acquired Inhibitex[2], mostly salivating over Inhibitix’s hepatitis C drug’s development (R&D that has since been halted). Gilead Sciences (NASDAQ:GILD[3]) followed up in February with its purchase of Pharmasset[4], which also had a compelling hepatitis C drug in the hopper.

Before the dust even had a chance to settle on the hepatitis C buzz, traders turned the heat up again on weight-loss drugs. That put Arena Pharmaceuticals (NASDAQ:ARNA[5]) and Vivus (NASDAQ:VVUS[6]) in the limelight. The former won its key drug approval for Belviq[7] on June 27, and the latter got its Qnexa approved[8] on July 17. Though both stocks are well below their post-approval high, each company has kept traders interested enough to keep arguing about which drug is better.

More recently, Sarepta Therapeutics (NASDAQ:SRPT[9]) shares rallied on some promising work with its Duchenne muscular dystrophy therapy. Cyclacel Pharmaceuticals (NASDAQ:CYCC[10]) took off on encouraging efficacy with the company’s Phase 2 trials of Sapacitabine, for elderly patients with myelodysplastic syndromes (MDS), though the bulk of that gain has evaporated. Achillion Pharmaceuticals (NASDAQ:ACHN[11]) shares nearly doubled in September when progress with one of its key developments revived the hepatitis C race. Of course, ACHN shares have lost half of that gain now that the euphoria has worn off.

Those are just some of the stories I can retell off the top of my head. Given time and reason, I could likely triple the amount of major biotech news that’s been created in 2012.

But that’s the problem.

So What?

Contrary to popular belief, just because the media tells you about it doesn’t mean you have to do something with it.

It’s admittedly tough to not take action when it’s crammed down your throat. Between March and July, I would estimate that 70% of biotech news coverage featured Arena and Vivus. And to be fair, it was big news. At the time, if the FDA gave either drug the green light, it would be the first weight-loss drug approved in more than a decade.

It wasn’t the only news out there for traders, however … it was just the only news you were getting. If you weren’t into trading one of those two binary events, then you were just out of luck.

It wasn’t until Achillion doled out its volatility in September and October, though, when I realized that I’m really kinda tired of handicapping the market’s drug-approval race.

It’s not that I can’t do the handicapping. In fact, I’ve done so pretty well, correctly predicting that Arena share would fall after Lorcaserin got the FDA’s approval[12], then correctly predicting that Vivus would give us the same post-Qsymia-approval pullback[13].

It’s just that the barrage of biotech news has been (1) a distraction from more important things, and (2) not really fruitful enough to justify the time I’ve spent tracking these stories down. With the exception of GILD and CYCC, all the stocks I’ve mentioned above are in the hole for the year, well shy of price levels they were supposed to be at by now, or both. For cryin’ out loud, the hepatitis C drug that Bristol-Myers Squibb paid $2.5 billion for by acquiring Inhibitex in January was canned in August following a patient’s death.

It all makes you wonder whether trying to trade the next big breakthrough or buyout is even worth the time.

The Smart Move

Yet, you have to love the biotech sector, and its overall resilience.

My solution — and what I think should be your solution, too: Get back to basics. Invest in the sector, rather than trade the onslaught of daily news. That means take on a long-term position in the SPDR S&P Biotech ETF (NYSE:XBI[14]), and leave it alone.

As an alternative, you could choose the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB[15]), though I’m partial to XBI. It’s a little less concentrated at the large-cap end of its allocation than the iShares iteration, with fairly even portions of Gilead, Amgen (NASDAQ:AMGN[16]), Affymax (NASDAQ:AFFY[17]) and ONYX Pharmaceuticals (NASDAQ:ONYX[18]).

Between the four stocks, you’ve got exposure to most of the biotech arena’s key segments. For instance, Gilead is huge in the HIV market, while Amgen is a leader in the anemia and arthritis fields. ONYX is a surprisingly big cancer player, and Affymax has done some amazing work in the war on kidney disease. All four companies also have made smart acquisitions over time.

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That’s about all I’m interested in after a very taxing 2012, and none of them are names I have to worry about getting chopped in half at the drop of a hat. It doesn’t hurt that XBI has a lower expense ratio of 0.35%, versus 0.48% for IBB.

Frankly though, you could do well with either fund. As the nearby chart shows, both have smoked the market since the beginning of 2011, and neither shows any signs of slowing down.

It’s certainly easier than trying to figure out how an individual biotech company’s chips are going to fall.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities, nor had plans to enter any within the next 72 hours.

  1. BMY:
  2. acquired Inhibitex:
  3. GILD:
  4. its purchase of Pharmasset:
  5. ARNA:
  6. VVUS:
  7. won its key drug approval for Belviq:
  8. got its Qnexa approved:
  9. SRPT:
  10. CYCC:
  11. ACHN:
  12. Arena share would fall after Lorcaserin got the FDA’s approval:
  13. Vivus would give us the same post-Qsymia-approval pullback:
  14. XBI:
  15. IBB:
  16. AMGN:
  17. AFFY:
  18. ONYX:

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