Biotechs Getting Blitzed :: Michael Shulman's Biotech Blitz

Biotechs Getting Blitzed

The first is Allergan (AGN) -- and this is a freebie as I recommend the stock in my newsletter -- is a great cosmetic medical company that leads most of the markets it plays in. It does facial aesthetics (Botox for the upper half of the face and Juvaderm for the lower half), breast implants, Lap Bands, dermal fillers and an entire product line for prescription eye care. And AGN beat estimates, raised guidance and the stock went up for two days despite the mortgage maelstrom that send most everything else down.

The second is Alkermes (ALKS) -- that's two freebies one one post, so consider this Christmas in August -- a great, revenue rich and profitable drug delivery company that currently makes most of its dough from Risperdal Consta, a one a month injectable schizophrenic drug marketed by Johnson & Johnson. They had very good numbers, and the stock was up more than 10% -- again, as the world bounced around them.

This is a very positive sign that biotech and life sciences companies that deliver, and are not subject to absurd whisper numbers (i.e., Palomar Medical, PMTI) will go up regardless of the market -- if they perform.

Speaking of the market -- is this a correction, a downdraft, a temporary glitch or the work of Death Eaters roaming far from Azkaban? (If you don't read Harry Potter, get with the program.)

It is, first and foremost, nervous investors taking profits in the face of a very volatile and increasingly unforgiving market - after all, some indices are, excuse me were, up more than 30% over the last 12-15 months. Investor fear is being driven by a re-pricing of risk: First, bonds backed by subprime mortgages; then bonds and Collateral Debt Obligations (CDOs - no time to explain, go to another blog or Wikipedia) backed by Alt-A mortgages; then bonds and CDOs backed by almost Alt-A mortgages; then regular mortgages and the attending CDOs; then bonds with lower credit ratings (often called junk) some with CDOs; then lower-grade commercial paper often used to finance private equity deals; then equity markets.

And, this all happens contemporaneously,

The spillover into equity markets was also driven by margin calls, as many bonds can be bought on 80%, sometimes 90% margin and that forced the liquidation of stocks to meet these calls.

And then, of course fear took over. Bear Stearns comes out and sings "Everything is All Right" (a song from Jesus Christ Superstar that presages what is to come in Gethsemane and beyond) -- except Bear Stearns' Judas was their CFO (who earns a lot more than thirty pieces of silver, I might add) who says it is the worst credit market in 22 years, and all hell breaks loose.

Does this cogent analysis mean the tumult is over? Hardly. Volatility is going to remain high, speculative biotechs will continue to take hits as the risk premium for owning these stocks continues to rise but good companies will be rewarded, sooner rather than later. So stick with good companies. Want to share some of your "good company" ideas with us?

Comments

Biotechs, like most other stocks, have been blitzed this week (forgive the pun) as the subprime mortgage woes spilled into other credit markets and the equity market. But there were two indications that investors are not selling off the entire market and will pay for performance. The first is Allergan (AGN) -- and this is a freebie as I recommend the stock in my newsletter -- is a great cosmetic medical company that leads most of the markets it plays in. It does facial aesthetics (Botox for the upper half of the face and Juvaderm for the lower half), breast implants, Lap Bands, dermal fillers and an entire product line for prescription eye care. And AGN beat estimates, raised guidance and the stock went up for two days despite the mortgage maelstrom that send most everything else down. The second is Alkermes (ALKS) -- that's two freebies one one post, so consider this Christmas in August -- a great, revenue rich and profitable drug delivery company that currently makes most of its dough from Risperdal Consta, a one a month injectable schizophrenic drug marketed by Johnson & Johnson. They had very good numbers, and the stock was up more than 10% -- again, as the world bounced around them. This is a very positive sign that biotech and life sciences companies that deliver, and are not subject to absurd whisper numbers (i.e., Palomar Medical, PMTI) will go up regardless of the market -- if they perform. Speaking of the market -- is this a correction, a downdraft, a temporary glitch or the work of Death Eaters roaming far from Azkaban? (If you don't read Harry Potter, get with the program.) It is, first and foremost, nervous investors taking profits in the face of a very volatile and increasingly unforgiving market - after all, some indices are, excuse me were, up more than 30% over the last 12-15 months. Investor fear is being driven by a re-pricing of risk: First, bonds backed by subprime mortgages; then bonds and Collateral Debt Obligations (CDOs - no time to explain, go to another blog or Wikipedia) backed by Alt-A mortgages; then bonds and CDOs backed by almost Alt-A mortgages; then regular mortgages and the attending CDOs; then bonds with lower credit ratings (often called junk) some with CDOs; then lower-grade commercial paper often used to finance private equity deals; then equity markets. And, this all happens contemporaneously, The spillover into equity markets was also driven by margin calls, as many bonds can be bought on 80%, sometimes 90% margin and that forced the liquidation of stocks to meet these calls. And then, of course fear took over. Bear Stearns comes out and sings "Everything is All Right" (a song from Jesus Christ Superstar that presages what is to come in Gethsemane and beyond) -- except Bear Stearns' Judas was their CFO (who earns a lot more than thirty pieces of silver, I might add) who says it is the worst credit market in 22 years, and all hell breaks loose. Does this cogent analysis mean the tumult is over? Hardly. Volatility is going to remain high, speculative biotechs will continue to take hits as the risk premium for owning these stocks continues to rise but good companies will be rewarded, sooner rather than later. So stick with good companies. Want to share some of your "good company" ideas with us?