Comment on the Sharp Correction in Small Biopharma Stocks
Let me say a word about the stock market and the small biopharma stocks that I am recommending. The second half of 2018 and December in particular have been terrible for the market as a whole and horrendous for small biophama stocks. Many of my recommendations are down sharply from recent prices and sometimes from where I initially recommended them. I know that it feels like small biopharma stocks (and perhaps the market as a whole) will never go up again. So what do we do here?
Let me recount a story to you. I was an analyst at Smith Barney responsible for research coverage of Amgen after Smith Barney conducted Amgen’s initial public offering on June 17, 1983 at a price of $18 (adjusted for subsequent splits the price then was $0.34 per share.) Over the next year and one-half the stock barely had an uptick and reached a low of $3.70 ($0.07 adjusted) on December 6, 1983. Unfortunately, the period after the IPO was one of market uncertainty and disillusionment with the new biotech industry. In regard to Amgen, my analytical conclusion was that the fundamentals really hadn’t changed meaningfully from the time of the IPO. It was market psychology that had changed. I felt intellectually compelled to retain my buy recommendation but let me tell you that clients were irate, the sales force was irate and quite disturbingly my boss was irate with the stock price decline. Of course, Amgen is now selling at $185 up from the $0.34 IPO price so all’s well that ends well.
This was really my first experience with the volatility of small biopharma. As my career went on, there were many other experiences remindful of Amgen. These and the Amgen experience taught me an important lesson and that is that even biotechnology companies destined for greatness will at times cause terror to investors as they experience problems particular to themselves or the overall market corrects. The problem with biotechnology investing is that the lead times for bringing products to market is very long and the failure rate for new products is high. In times of fear and uncertainty these high risk characteristics inevitably lead to substantially greater price declines than the market as a whole.
Since Amgen, I have gone through many uncomfortable periods in which the stock(s) I was recommending went through a sharp correction. Sometimes the stocks bounced back and sometimes they kept right on going down. I have had my fair share of disasters as I think any biotechnology analyst has. However, I have concluded that the overwhelming determinant for the ultimate stock price of a company was whether the products it was developing were ultimately successful or failed, not market fluctuations. This guides my approach now. As long as I perceive that the fundamental outlook is substantially unchanged, I don’t change my view if the stocks fall out of favor. This will sometimes lead to long periods of stock price declines until psychology turns. I know that there is a somewhat trite saying that investing is a marathon and not a sprint and if this is true, it is especially the case for small biopharma stocks.
If I could call market directions, I would have a different attitude and I would confidently trade in and out of stocks. However, I can’t predict market swings and having been on Wall Street for over 40 years, I haven’t found anyone else who can although this is not for lack of people who claim they can. My experience is that trading too often leads to buying high and selling low. As long as our economy continues to grow, the market will have its ups and downs, but the market trend will be up or at least it has been that way since the signing of the buttonwood agreement in New York on May 17, 1792 set the stage for forming the New York Stock Exchange.
I wrote this blog because I continue to write reports and recommend stocks on which I have a favorable fundamental outlook. I am of course aware of the horrible market and because I invest in my recommendations, I feel the pain of watching the prices go down. However, I continue to follow the discipline that began with Amgen and that is to focus on the fundamental outlook and try to keep from getting caught up in volatile swings in market psychology. There will be a brighter day. I continue with my Buy recommendations on Agenus (AGEN, $2.42), Antares (ATRS, $2.67), Cryoport (CYRX, $9.65), Cytokinetics (CYTK, $6.29), Northwest Biotherapeutics (NWBO, $0.22), Portola (PTLA, $15.66) and Repligen (RGEN, $50.30).
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