What to Learn From the Sonus Blowup

At around $4, Sonus looked cheap going into the phase III TocP data. In my last column, I wrote about some of the reasons why investors seemed to be steering clear of the stock, including a partner, the German drug maker Bayer, that seemed to be giving Sonus the cold shoulder.

Well, it turns out that Sonus was cheap for a reason. Sure, the risk/reward ratio looked good, and perhaps Sonus could have been a stock that was simply being overlooked or forgotten by institutional investors. That sounds good, but unfortunately, it's rarely true, and certainly not in this case.

Lastly, Lesson No. 4: Biotech is risky -- assume that something will go wrong and plan accordingly. Diversify and look for stocks that can survive a blowup.

Sonus is now trading below cash. Why? Because investors have discounted Sonus' entire technology platform along with TocP, therefore its cash reserves, if spent progressing a worthless or questionable drug delivery platform, will be squandered.

If Sonus had something else to fall back on -- another drug, another technology -- it might be better suited to weather the inevitable disappointments that come with biotech drug development.

I know many investors love single-digit biotech stocks with the potential to double or triple overnight on news of positive clinical data. But remember, these are also the stocks least likely to survive bad news. High-risk biotech stocks are great fun, but only in moderation.

Investing in Gilead Sciences(GILD) at $30 because you think it's worth $40 may not be sexy, but the odds of making money are better -- and the chances of a cataclysmic blowup like Sonus are a lot rarer.

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