Is it safe to buy biotech stocks, when the rumours/news is out about their buyouts? — Ashwani
Is it ever “safe” to buy biotechs? These are some of the most volatile investments on Wall Street — able to make or break your portfolio overnight.
For starters, let’s be honest about most biotech stocks. They’re simply launching pads that in a best-case scenario see their innovative drugs pass clinical trials with flying colors and win FDA approval, causing the stock to blast off. Then shortly after, Big Pharma comes knocking with a buyout that sends the stock screaming even higher.
Worst-case scenario, on the other hand, is a failure of the new treatments that results in the company blowing up on the launch pad.
The result can be either huge profits for investors or a painful loss. There’s rarely a middle road.
Understand this first and foremost: Biotechs and upstart medical device stocks are a risky game.
Second, remember that buyouts are the name of the game — so rumors constantly circulate with varying degrees of truthfulness. Unscrupulous investors may be simply looking to “pump and dump,” so always take everything with a grain of salt.
That said, buyouts happen — and can deliver big profits when they do.
Take Human Genome Sciences (NASDAQ:), bought out by GlaxoSmithKline (NYSE:) for $14.25 a share after trading as low as $7 just weeks before the deal. Or Amylin Pharmaceuticals (NASDAQ:), bought by Bristol-Myers Squibb (NYSE:). The Amylin-BMY deal kept creeping up before finishing at $31 a share, providing a quick doubler for AMLN shareholders.
These are the dream stocks. But don’t forget the nightmares out there.
Those are companies like MAKO Surgical (NASDAQ:
), which is down 41% this year, back to 2010 valuations, as its technology for knee-replacement surgery hasn’t panned out as investors planned. Other flops include Dendreon (NASDAQ:), down 35% year-to-date, and Progenics Pharmaceuticals (NASDAQ:), which lurched down about 50% just a few weeks ago.
There’s nothing inherently wrong with biotech investing, but unless you’re willing to do the legwork on FDA trials and medical studies, and unless you have a good knowledge of science to fully comprehend how the drugs work and what they treat … well, I’d steer clear.
Small-cap biotechs are exciting because of the profits they can deliver. But if you’re a novice with no medical background and no interest in getting lost in journal articles on genetic disorders, you’re better served investing in a safer and more accessible corner of the market.
But if you don’t mind the risk and relish the research, there are big profits to be had — particularly if a hit drug makes your holding a buyout target. That’s the ultimate payoff for a biotech investor.
Just beware that if you’re reading the rumor on Seeking Alpha or TheStreet.com, some of the buyout hopes may already be priced in as a premium … and if it doesn’t happen, you’ll be left holding the bag.
Jeff Reeves is the editor of InvestorPlace.com and the author of Write him at editor@investorplace.com or follow him on Twitter via . As of this writing, he did not own a position in any of the stocks named here.
