Nice Article on Biotechnology Stocks

SAN DIEGO-- The moral of the story of Northfield Laboratories is that no matter how hot a biotech story may be, in the end it's the science that counts.
The biotech company's stock tumbled 20% before Tuesday's close and another 50% in the after markets following its disclosure not only of disappointing preliminary late-stage test results, but that the results included "discrepancies."
Never mind the normal risks associated with biotech: The risk of disappointing results was high at Northfield for the simple reason that since its founding in 1985, it has been working on a blood substitute -- a holy grail of biotech that has left a trail of stock-market blowups in its wake.

That's why Northfield was one of three potentially hazardous biotech companies I mentioned over the weekend in the Wall Street Journal as having unusually high-risk following last week's share-price implosions of Nuvelo and NeoPharm. Both lost much of their market value after releasing disappointing late-state clinical trial results.

While final data for Northfield may be different once the discrepancies are cleared up, investors should once and for all realize there are no guarantees when dealing with drug trials and approvals. "When you are investing in the biotech sector, you have to be careful," says David Miller of Biotech Stock Research, an independent research firm in Seattle. "It should be a portion of a diversified portfolio, and the portion you have in biotech should itself be diversified, because only one out of every 10 biotech companies succeeds."
Caution may sound obvious, but it can't be stressed enough considering that a typical disappointment, Miller says, can lead to an overnight share loss of 40% to 60%.
In the wake of Northfield, Nuvelo and NeoPharm, which companies hold similar risk? It's anybody's guess, of course, but it's not hard to find published warnings on more than a few biotech companies.
Among them: Telik, an 18-year-old Palo Alto, Calif., company that any day is expected to report test data on its Telcyta-branded drugs for ovarian and lung cancers. Like many aging developmental biotech companies, it has dug a deep hole of losses, which as of last quarter totaled around $375 million on virtually no revenue and a market value of about $866 million. While its stock has been declining, Lehman Brothers analyst Jim Birchenough, a physician by training, downgraded it last month to "underweight," saying that based on his read of available data, he believes "significant downside risk exists...." A Telik spokeswoman declined to comment.

Then there's Neurochem , whose shares have leaped more than 40% over the past month -- tripling since August -- largely on anticipation for its Alzhemed Alzheimer's treatment, whose final round of test results are expected this spring. Founded in 1986, the Quebec-based company has nearly $200 million in accumulated losses, little in the way of revenue and a market value of $961 million. Noting the stock's recent rise, Toronto-based RBC Dominion Securities analyst Philippa Flint, who rates the stock an "underperform," told clients that "investors are assuming minimal risk of clinical development," when instead "we believe the risk is excessive and recommend investors take profits." Toronto-based Sprott Securities analyst David Dean went a step further, saying that "the trials are likely to fail."

Neurochem Chief Executive Officer Francesco Bellini acknowledges that the trials are "difficult" and that they "may fail." But he also says the patients in the current trial appear to be "doing well" and he wouldn't be an investor in the company if he didn't believe in the drug.

But even Mr. Bellini says investors in biotech should diversify. And what if the skeptics are wrong? "You have to always keep in mind, no matter how sexy the drug, no matter how bad you want prostate cancer cured -- in the end, you're not making a charitable donation," Mr. Miller reminds investors. "It's your investment capital, and you have to protect yourself by spreading it around." Just ask anybody who, sadly, bet it all on Northfield.

Source: Marketwatch.com