These Guys Are Out to Cheat You
A Note From the Editorial Director: Investing in biotech companies whose drugs are still in development is not a game for amateurs to play on their own, and Marc Lichtenfeld's column today is a great reminder of why. The drug-development business can be wildly profitable, but it's also speculative... and that's when everyone is honest. And as Marc shows us today, they're often dishonest.
If you haven't already, it's time take notice of the amazing gains Marc has delivered his Healthcare Profits Alert subscribers. They enjoyed a 69% average gain last year, including eye-popping winners like 419% for Celldex (Nasdaq: CLDX) and 188% on NPS Pharmaceuticals (Nasdaq: NPSP). For access to Marc's expertise, and his finely tuned B.S. meter, click here.
- Andrew Snyder
If you were to take a trip to an exotic location that had hidden dangers like man-eating crocodiles or dangerous plants, surely you'd bring a guide.
Yet many investors try their hand at speculating on small-cap biotech stocks without having an expert help them. It's not that these investors can't figure out a good stock from a bad one. But in small-cap biotech particularly, the waters are rife with danger - not only from the ordinary risk that comes with investing in new technologies, but from manipulation and outright fraud.
I'm sitting at the airport in San Francisco, going over my pages and pages of notes from presentations and meetings at the J.P. Morgan Healthcare Conference. But what's sticking out most to me are not the amazing new life-saving innovations that I learned about or the brilliant scientists that I met, but the flip side of that equation: the scammers who prey on the little guy.
During the week, I met:
- An analyst who admitted that he puts buy ratings on stocks even though the companies are garbage because his top priority is making money for himself.
- An investment banker who talked up a company he was bringing public by merging it into a shell corporation of a defunct retailer. Biotech is tough enough when you have honest people trying to do honest work. What do you think the likelihood of success is for a company whose only way of getting funding is to merge into the shell corporation of a bankrupt retailer? My guess is this company is not the one that's going to cure cancer.
- Newsletter writers incredulous that I don't buy the stocks I write about first in order to benefit from the move that the stocks sometimes make after I recommend them. (The Oxford Club has a strict policy that its editors are not allowed to write about anything they own.)
- A CEO who blew so much smoke up my skirt that I wasn't sure if he was trying to pitch his company or date me.
Don't get me wrong, it wasn't all bad. There are still some great companies like Novartis (NYSE: NVS) and Roche Holding (OTC BB: RHHBY) in the big-cap pharma space doing great things.
I also came away very optimistic about the future after seeing the work of small- and mid-cap biotechs like OvaScience (Nasdaq: OVAS), GW Pharmaceuticals (Nasdaq: GWPH) and Alnylam (Nasdaq: ALNY).
The point is that biotech can be a tough game. The companies have to prove their drugs are safe and effective and can pass the regulatory process, and after all that there is no guarantee that the drugs will be a commercial success.
If you're going to speculate in the space and you're not an expert yourself, be sure you're using a qualified guide, whether it's me through my Healthcare Profits Alert or someone else. There are too many man-eating investment bankers, analysts and newsletter writers out there waiting to take advantage of your optimism.