Biotech Catalysts

One aspect of biotech that is not well understood -- even by investors who currently own biotech and other life sciences stocks -- is the importance and predictability of what are known as catalysts. Catalysts are events that drive the stock, up or down.

A catalyst can be an FDA approval or rejection of a drug, the publishing of data, a presentation at a professional conference and so on. And, unlike almost all other industries driven solely by earnings and revenues, many catalysts have dates that are predictable -- even if the substance of the catalyst is not always easy to forecast.

Let's do what Freud did -- we'll explain the normal by analyzing the abnormal. Today, ELAN (ELN) soared on news that the company and its partner Wyeth (WYE) would ask the FDA's permission to begin a Phase III (or late-stage) trial for a drug for mild-to-moderate Alzheimer's disease.

Think about it. They are planning to ask the government permission to do something that will take two to three years to generate an actual approval, yet Elan shares climbed 16% on the news. And, to many investors, this was a total surprise because the Phase II trial data is still blinded -- the companies are not aware of how the placebo group performed against the group getting the drug. And this data would not be available for full analysis until next year.

Again, this caught everyone, including yours truly, by surprise. If the trial had been completed, along with the data being assembled, this announcement would be anticipated and the stock would have moved up only a bit, or fallen very sharply, depending on what the two companies planned on doing.

Another example is Spectrum Pharmaceuticals (SPPI). The company is publishing complete data from a trial for cancer treatment satraplatin this week. The results are pretty much known -- and the stock will not move a great deal unless SPPI publishes a surprise. But investors are well aware of this event and volume in the stock was much heavier last week than normal.

So, what should you do in these events?

If you are into a stock for the long haul and have a strong stomach and well-disciplined central nervous system, catalysts such as these mean little, so long as the fundamental story for the company remains unchanged.

If you are a short-term investor or have problems with volatility, then you better know the catalysts facing a company for any given period of time. You can find these yourself, subscribe to newsletters, even contact the company and ask what they see as catalysts or news for the coming months. This will help you make short term decisions or ride out volatility.

Predicting what the company will actually publish or announce or accomplish is a whole other matter.

Stay tuned, my next piece will be on predicting binary events.