The whole "take something off the table" biotech call comes with tremendous trepidation for me. I have an "own it, don't trade it" philosophy on Biogen Idec (BIIB), Regeneron (REGN), Celgene (CELG) and Gilead (GILD), dating from when I wrote Get Rich Carefully almost two years ago (click here for an autographed copy of Get Rich Carefully if you subscribe to Action Alerts PLUS). Others that I fear might give up gains -- Prothena (PRTA), Receptos (RCPT), Isis Pharma (ISIS) and BioMarin (BMRN), as well as Esperion Therapeutics (ESPR) -- have been Monsters of the Midway.
I don't want to cash out of the Four Horsemen of the Big Pharma Apocalypse for the same reason I first recommended them: They keep getting better and better. I selected Biogen, for example, because of its emerging multiple sclerosis franchise. In the time since the book has come out, Biogen has revealed a remarkable Alzheimer's treatment that no one knew it had. That's why you pick a stock like Biogen.
Celgene has a very exciting anti-psoriasis compound as well as an anti-cancer franchise that could be astounding for breast cancer, advanced non-small cell lung cancer and advanced pancreatic cancer. These were pretty much gleams in the eye when I wrote Get Rich Carefully.
Gilead has since burst onto the scene with perhaps the biggest drug in the whole era, hepatitis C drug Solvaldi. And Regeneron, which keeps winning, now has the results on its anti-cholesterol injection that might be gigantic for those who can't tolerate the current crop of statins or need them augmented. Only Amgen (AMGN) has anything like it right now.
So, you have unbelievable stocks but you also have stocks that have run a great deal and are, therefore, very vulnerable to profit-taking. One could argue that instead of selling them, you could hedge the group with puts on the NYSE ARCA Biotech Index (BTK), which is up 23% this year. That might be one way to go. The other way is to trim so you are ready if we catch a March-April selloff like the one we had last year. The trimming plan, however, does directly contradict my own "don't trade" dictum. Nevertheless, these are not Apple (AAPL), which is cheap. They have become expensive to near-term earnings. I leave it to you what to do, but suffice it to say, I am concerned.
The others are more problematic and trading on both approvals and positive comments, as well as the possibility of take-outs, given the three old-line pharmas that were supposed to be bidding on Pharmacyclics (PCYC) before AbbVie (ABBV) snapped it up. Pharmacyclics, which had its key compound, Imbruvica, for leukemia, already half-owned by Johnson & Johnson (JNJ), represented a major opportunity for AbbVie, which fears the generic and biosimilar competition for its blockbuster Humira drug. To put it in perspective, Pharmacyclics was already up 88% this year before AbbVie's bid, which makes it theoretically possible for any of a host of companies, including the junior ones mentioned above, to get a bid from a starved big pharma company.
That's certainly possible, but what happens if they don't? Then it depends on the money. I had Prothena's CEO on Mad Money Friday. It has a promising Parkinson's drug that got positive Phase I results last week, causing the stock to soar to $38 from $28 in two sessions, up 86% this year alone. I don't fear an equity offering from Prothena because it has plenty of money to see the tests through and have a terrific partnership with Roche (RHHBY), which could be good for $600 million in milestone payments. The company's no slouch; it's been working for 20 years on this drug. So why sell some? Simple: Because it's up so much and that's what you do -- or at least that's what you did before Pharmacyclics got its super-premium bid.
Or take Esperion, a company with a promising pill that apparently does the same thing with bad cholesterol that the injectable drugs Regeneron and Amgen have. I have been a huge backer of this company and was thrilled when it came out with results this week that showed that all was so far, so good on its Phase II study of its pill. It sounds like this drug, which I thought was much further out in time and well behind Regeneron and Amgen, might be just a couple of years away. I was concerned, though, that it might have to raise money to complete the trials. Sure enough, the company reported the results and the stock shot up to $100, and then it raised $150 million in a $100-per-share secondary and went to $112 by the end of the week. When I spoke to the company I came away totally impressed, but I also came away concerned that the stock was now up 177% for the year. That's way too much for me to stay as bullish as I was.
With BioMarin, I have loved it as a company going from orphan to full-line pharma. Again, though, the stock's up 38% for the year, largely because of Pharmacyclics-like takeover chatter. It's not prudent to stay fully invested when you can play with the house's money.
Isis Pharma has many irons in the fire, including a promising anti-clot drug that could be huge but won't be known for maybe a year. The shares are heavily shorted but might be something gigantic.
Receptos has the potential for the breakthrough ulcerative colitis drug among a host of other products. If you asked me which of the junior biotechs has the best hope of being the next Pharmacyclics, it would definitely be Receptos.
The red-hot immunotherapy and novel-formulation drug companies are another story. Juno Therapeutics (JUNO), Celldex Therapeutics (CLDX), Halozyme Therapeutics (HALO), Kite Pharma (KITE), and Bluebird Bio (BLUE) all have terrific formulations, and I could see putting together a basket of them because they are so red-hot that one or two seem likely to have something huge -- but I don't think all of them can. Agios Pharma (AGIO), which has an extremely novel anti-cancer methodology, could also be gigantic. Still, all of these have run. They are part of the animal-spirited portion of the biotech universe and are almost impossible to keep up with; hence, I am hesitant to say they are buys. Still, these are targeted-therapy companies and they have real possibilities. If we ignore these super junior biotechs, we might regret it, even though they are all up a great deal and could do secondaries on a moment's notice.
It is entirely possible that all of these keep humming. We know that the entire complex has seen no real signs of quitting since it started moving up in December 2011 when the BTK was at 1048 and is now approaching 4000 -- an amazing run. If you look at the chart of that move, though, there were incredible swings that could really shake you out. How much better would it be if you took something off every one of these and readied yourself for the swings? This is really why I came out and said what I did on Friday's Mad Money.
I know I could be early. But after this run, there is no way I could be wrong, and that's the best place to be. Prudent money management in the face of once-in-a-lifetime moves could be reversed at a moment's notice on so many different factors -- a new crop of initial public offerings, a blown trial, a rotation into cyclicals. These factors have plagued the group in the past and can do so again. To do nothing is pure greed, and that's not a strategy I can endorse after moves that can only be described as parabolic.
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