Lessons From A Losing Biotech Portfolio
BOSTON (
) --Changes made in August to the Biotech Stock Mailbag Readers' Portfolio (BSMRP) provided a modest boost to performance but the portfolio's overall return is still deep in the red and has little hope of outperforming its biotech sector benchmark for the year.
I'm afraid it's time to pull the plug on this failed experiment in reader-generated biotech stock picking, but still, there are good biotech investing lessons to be learned from the losses.
As of November 23, the BSMRP, a portfolio of 20 biotech and drug stocks chosen by readers of my weekly Biotech Stock Mailbag, is down 13% compared to a 6% gain in the benchmark iShares Nasdaq Biotechnology ETF. If this were a real biotech hedge fund, investors would be asking for redemptions and the portfolio manager would be looking for a new job.
Instead of dwelling on the negatives, let's look at the reader stock picks that performed well. The No. 1 pick was
Keryx Pharmaceuticals
(KERX) - Get Report
, which returned an impressive 89% this year. Keryx was an original pick in the BSMRP, added Jan. 15 at $2.77. The stock closed Friday at $5.18.
No. 2 among the stocks picked by readers in January was
Ariad Pharmaceuticals
(ARIA)
, returning 58%.
What's interesting about Keryx and Ariad is that both companies have late-stage drugs in incomplete phase III studies, yet neither company has a drug approved nor generates any product revenue. In that respect, both companies are works in progress that have yet to live up to their potential -- and may or may not depending on the outcome of their ongoing phase III studies.
That both Keryx and Ariad delivered the top returns in the BSMRP shows how biotech investors often prefer to take early, anticipatory positions in biotech stocks ahead of major stock-moving events like phase III study results or FDA approval decisions. This is the "Bio Run-Up" strategy that's become a popular biotech stock trading method this year.
The announcement of results from the respective phase III studies underway by Keryx and Ariad are expected next year. Adherence to the rules of the "Bio Run-Up" trading strategy requires selling positions ahead of the stock-moving catalyst. It will be interesting to watch if this rule applies to both these stocks as the respective data releases near.
If biotech investors like to get in early and get out before it's too late, they also seem reluctant or less enthusiastic about holding stocks after a drug is approved. Holding long positions in biotech stocks after a drug approval has been a losing strategy this year. Conversely, shorting post drug-approval biotech stocks has returned profits almost every time.
Witness
Allos Therapeutics
( ALTH), which was selected for the BSMRP in January soon after FDA approved the company's lymphoma drug Folotyn and when expectations for the drug's commercial launch were high. Unfortunately, Folotyn sales have disappointed and Allos' stock price has suffered. Added to the BSMRP at $7.50, Allos closed Friday at $4.29 -- 43% loss.
Even Dendreon, one of the bigger success stories of the year, has not been immune from the investor worries that grip companies launching new drugs.
Dendreon
(DNDN)
is up 27% in the BSMRP making it one of the bigger winners, but the stock is down 35% from its $55-a-share high for the year reached in the days after the prostate cancer therapy Provenge was approved in late April.
Dendreon proves that longs and shorts can both win trading the same stock depending on the timing of the trade.
More observations from the BSMRP's performance this year:
- Vertex Pharmaceuticals (VRTX) - Get Report was added in January at $40.21 but closed at $34.29 on Nov. 23. Vertex was a 15% drag on the performance of the BSMRP this year despite the release of overwhelmingly positive results from phase III studies of the company's hepatitis C drug telaprevir. Timing, valuation and built-in investor expectations (in this case, high) weighed down Vertex's stock price despite strongly positive clinical developments.
- Seattle Genetics (SGEN) - Get Report was a big winner, returning 45% to the portfolio on the back of two positive phase III studies for the company's lymphoma drug brentuximab vedotin. Unlike Vertex, Seattle Genetics' valuation wasn't pricing in drug development success.
- Human Genome Sciences( HGSI) lost 15% despite generally positive moves forward for the company's lupus drug Benlysta. The lesson here may be a simple as avoiding buying biotech stocks in early January when optimism (and prices) are high. Better to wait for February and March when the sector generally cools off and stocks can be bought at more reasonable prices.
- Spectrum Pharmaceuticals (SPPI) - Get Report lost 8% -- another stock in which investors have shown little patience waiting for a drug's commercial launch to yield significant revenue.
- StemCells (STEM) and Geron (GERN) - Get Report lost 15% and 4%, respectively. Again, timing is everything, especially with small-cap, catalyst and news-driven stocks. Both of these stocks were better trades than investments, especially in recent days.
--Written by Adam Feuerstein in Boston.
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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;
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