Credit: Shutterstock photoImagine there is a stock that had all these attributes: it delayed, but didn't cure, cancer, giving patients longer lives by 3 to 6 months. Yes, it was expensive to produce, but the benefits were so important that patients demanded the drug, prolonging their lives long enough to deal with so many important issues before passing on.
The demand was so great, the biotech making the drug couldn't produce enough. It opened more labs, trying to keep up, and finally had several functioning manufacturing plants. It still couldn't keep up with demand, but it was able to make profits with the new capacity.
Doctors loved the drug. It was the only hope for many of their prostate cancer patients. They prescribed it without reservation.
The FDA liked it as well, blessing it with full Medicare coverage, even though the treatment cost over $90,000 in a month. But without competition and the public demand for the drug, the FDA almost had no choice.
Let me recap for you: a company makes a drug that is so popular it can't produce enough. Demand is growing. Doctors welcome it. The FDA approves government funding for those who qualify for it. Is this an ideal investment or what?
It's an or what. The one detail that was its fatal flaw: getting reimbursed by the government was so onerous that doctors were reluctant to treat Medicare patients. In other words, doctors had to bear the cost of treating a patient with the drug, then go through the application process and wait for re-imbursement. That's hard on cash flow for the doctor who is also a businessman. If a doctor has several prostate cancer patieints, it becomes almost prohibitive.
When the company announced the news about slowing sales, its stock crashed, down 62% in a day. Instead of reaching $370 million for this year, it looked more like the total would be closer to $200 million, almost half what analysts expected. Investors don't like these kinds of shortfalls. They sell stocks that underperform or don't meet expectations. Many even sell them short. Investors who hold on feel great pain.
The moral of this tale: just when you think everything, and I mean everything, is good about a stock, it can still surprise you but not in a good way, like my bonus was bigger than I thought it was going to be. It's more like: they cut my bonus and I'm wondering if I will keep my job kind of way.
That's why not loading up on any one stock is always the best way to invest. Keeping a decent diversity among industries is so important. Allocating only a certain percentage to each stock so that if it gets wiped out (down 62% in a day qualifies for that), it won't feel like the world has ended. It still hurts, but the wound isn't fatal.
Keep this story in mind the next time you get too excited about any one stock. There may be a nasty surprise waiting, one that you would never think of in a million tries or years. The stock? Dendreon. You could look it up.
- Ted Allrich
November 1, 2011
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
