Thursday, December 17, 2009
Biotech stocks are terrible long-term investments...
Few biotechs ever achieve long-term success. After all, less than 10% of all drugs in the lab ever make it to the market. Fewer still generate enough sales to justify the hundreds of millions in development costs necessary to gain FDA approval.
Even astute investors who bet correctly on the next big winner don't typically experience returns big enough to justify the enormous risks involved. We can thank hapless management teams for such risks...
Once a successful drug starts bringing in gobs of free cash flow, biotech managements have an uncanny ability to squander away the money. They dream up outrageous compensation schemes, build needless corporate headquarters, and spend exorbitant amounts on ridiculous acquisitions. The shareholder never enters the picture.
So why have I devoted my life to biotech investing?
For one, biotech stocks can generate returns of 100% or more in a single day. Furthermore, the extreme day-to-day volatility creates many entry points where the risk-to-reward completely tilts in your favor. In these cases, well-timed investments in biotech stocks are more lucrative than almost any other sector in the market.
One way to increase your odds of winning in the long run when investing in biotech is to follow activist investors. These guys establish major positions in companies with valuable assets and incompetent management. Some take extreme measures, ousting the CEO and board members and taking the lead themselves.
I believe the next biotech ripe for an activist shareholder shake-up is OSI Pharmaceuticals...
The company's blockbuster lung-cancer drug, Tarceva, brings in more than $300 million in cash flow every year. But OSI might as well rake that money into a pile and set it on fire...
Instead of returning the profits to shareholders, OSI's management team decided to dole out more than $650 million on an ill-conceived acquisition back in 2005. In less than 18 months, newly approved drugs from Genentech made the drugs OSI bought obsolete. Sales dropped 95% overnight.
OSI ended up writing off the whole acquisition. Meanwhile, shareholders took a 50% haircut.
Guess what happened to OSI management for destroying hundreds of millions of shareholder dollars? Nothing.
The same clowns are still running the company. (Don't get me wrong, I believe OSI has an excellent research team. Unfortunately, shareholders haven't benefited from their skills.)
I'm watching and waiting for the day Bill Ackman, Dan Loeb, or Carl Icahn – activist investors who have had proven success turning losing stocks into huge payouts – establishes a position in OSI. That'll be when I advise my readers to jump in.
Until then, I'm on the sidelines. And you should be, too.
U.S. crude inventories fall more than expected... oil jumps 3% to $73 a barrel.
The stealth bull market in agriculture continues... cotton ETF (BAL) hits a new 52-week high.
Big Tech firms Microsoft, Google, and Hewlett-Packard make fresh highs.