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At Least One-Third of These Stocks Are Worth Zero

By Dr. George Huang
Friday, February 27, 2009

Dozens of biotech companies will go bankrupt this year.
The overwhelming majority of biotech companies make no money. So they depend on public and private funding to keep the lights on.
But the recent carnage in the markets has scared investors away from anything risky. And a cash-burning biotech stock, with profitability a decade away, is about as far away from U.S. Treasuries as you can get.
The numbers tell the real story. Year-to-date, the biotech industry has raised only $3.6 billion, well behind the $13.6 billion companies had raised by this time last year. At this rate, we're on pace for the most abysmal fundraising year in more than a decade.
And right now, more than 50% of publicly traded biotechs have less than a year of cash on the books.
To preserve cash, companies are cutting staff and slashing expenses. For the few biotechs with decent drug candidates, selling the drug rights for cash and royalties is an option. Unfortunately, the rest are headed into bankruptcy. Here's why...
Because funding is tight, companies with drugs lacking meaningful data will not find partners. And with share prices so low, they won't be able to raise cash without massively diluting shareholders. What's left is a crushing debt load and high cash burn – a recipe for bankruptcy.
Just like the bungling automakers in Detroit, the biotech industry is overdue for a massive housecleaning. Management can no longer use companies as their own scientific playground.
I believe at least one-third of the industry doesn't deserve to exist. And I couldn't be happier to see this turn of events. If worthless biotechs get the boot, investors will allocate funds to well-run companies with realistic products, making the industry healthier and more profitable over the long run.
That'll take awhile to happen. If you want to profit from the situation today, you need to find companies with dwindling cash reserves, shoddy science, and questionable management... and sell shares short. (For my FDA Report subscribers, I have made the task easier with our "Biotech Crash List.")
Here are two companies that are hanging by a thread:
For three years, Discovery Labs (DSCO) has been trying to get its drug, Surfaxin, approved by the FDA. The drug works without question. However, Discovery has struggled to meet manufacturing requirements. In fact, the company has failed three times in four years... for the exact same reason.
Discovery shareholders have lost more than 80% since 2006. And I expect the pain isn't over. Even if Surfaxin wins approval, I don't have any confidence the company will know how to sell it. With cash running low, any tiny hiccup will cause the shares to collapse another 50%.
Savient (SVNT) has only one drug: Puricase, a gout treatment. The company is hoping to win FDA approval this year. But back in October, the company disclosed that in two Phase III clinical trials, eight patients on Puricase experienced severe cardiovascular side effects (heart attack, heart failure, or abnormal heart beat). No patients on placebo experienced such effects. I expect the FDA to demand another clinical trial. Any delay will likely mean a 50%-90% haircut for Savient shareholders.
If you're looking for the next "biotech crash," I'd start with these two. But weak biotechs are lining up to fall into their graves... It shouldn't be hard to find many more over the coming months.
Good investing,
George Huang

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Market Watch
Symbol Price
S&P 500 1223.75 +0.1% +10.9%
Oil 37.80 -1.1% +0.8%
Gold 136.50 -1.9% +20.7%
Silver 28.08 -4.9% +57.6%
US-Dollar 79.65 +0.6% +5.2%
Euro 1.33 -0.3% -10.5%
Volatility 17.99 -0.2% -18.6%
Gold Stocks 576.48 -2.5% +25.0%
10-Year Yield 3.16 +7.5% -8.4%

World ETFs
Symbol Price
USA 122.83 +0.1% +10.8%
Canada 30.41 -0.5% +17.1%
Russia 22.00 +0.1% +18.9%
India 38.15 +0.6% +22.5%
Israel 16.92 +1.0% +11.2%
Japan 10.56 -1.2% +6.6%
Singapore 13.66 -0.4% +18.6%
Taiwan 14.87 -0.3% +19.0%
S. Korea 57.35 +0.3% +21.8%
S. Africa 71.15 -1.5% +28.2%
China 43.99 +0.3% -1.5%
Lat.America 52.69 -1.0% +8.5%

Sector ETFs
Symbol Price
Oil Service 134.90 -2.1% +18.0%
Big Pharma 64.04 +0.1% -2.8%
Internet 72.89 +0.4% +27.4%
Semis 16.25 +0.4% +26.6%
Utilities 30.98 -0.7% +0.2%
Defense 18.55 +0.4% +8.7%
Nanotech 10.16 +0.8% +1.6%
Alt. Energy 10.20 -0.4% -4.6%
Water 18.77 +0.8% +14.5%
Insurance 16.14 +0.4% +19.6%
Biotech 20.65 +0.4% +27.3%
Retail 19.65 +0.3% +27.0%
Software 24.83 +0.7% +24.3%
Big Tech 53.88 +0.1% +22.7%
Construction 13.30 +0.8% +16.2%
Media 13.75 +0.2% +23.7%
Consumer Svcs 67.43 +0.1% +23.1%
Financials 54.95 -0.1% +7.0%
Health Care 63.89 0.0% +1.3%
Industrials 63.79 +0.4% +19.8%
Basic Mat 74.54 -0.1% +27.5%
Real Estate 55.53 +0.3% +24.4%
Transportation 91.65 +0.3% +25.1%
Telecom 22.69 +0.2% +14.6%