Source: Flickr user snowlepard
For example, over the last month the media has been honing in on South Korea, which has been dealing with the largest outbreak of Middle East Respiratory Syndrome, or MERS, outside of Saudi Arabia. Through this past weekend, some 185 cases were confirmed, resulting in 33 deaths. MERS, which originates in camels, is deadly to humans about 40% of the time, and there currently is no cure. Therefore, all eyes are on drug developers that could be at the forefront of MERS vaccine innovation.
One such company is Novavax , a clinical-stage company focused on respiratory syncytial virus vaccines, influenza vaccines, and global diseases such as Ebola. Novavax has also done work with MERS, publishing a study in April 2014 in collaboration with the University of Maryland School of Medicine that showed its preclinical MERS vaccine candidate blocked infection in laboratory studies.
Keep in mind here, we're talking about a preclinical study , so commercialization of the product would be, in my mind, multiple years out. However, Novavax stock exploded higher in June to the tune of 24%. Novavax does have a number of catalysts upcoming in the third-quarter, including data from four of its clinical studies, but the apparent catalyst in June appears to be the MERS outbreak in South Korea.
I would contend that bidding up Novavax shares on the heels of the MERS news is a mistake on the part of investors for three primary reasons. One, as we noted above, is that a commercial product is likely years away.
Secondly, the vaccine market itself can be very hit and miss. Although I'd love to see a MERS cure come to market, because every life is important and worth saving, there's also a matter of economics and feasibility that comes into play. In other words, will it be economical for vaccine developers to spend the money to create a vaccine if only a few hundred cases are reported? Vaccine developers are at the mercy of orders from global governments, and if those orders don't come in, or demand isn't anywhere near supply, then they could eat huge losses.
Lastly, viruses are often mutable, meaning that a working vaccine one moment could be worthless the next based on how a virus evolves. Like the Avian bird flu, we could see variations of the strain come and go without warning.
MERS isn't the only news-chasing event
But trading in potential MERS vaccine developers isn't setting any precedents; it's just the latest in a series of "chasing the news"-type events.
Smart biotech traders can avoid the dangers tied with chasing the news by employing some, or all, of the following tactics.
Source: Tekmira Pharmaceuticals
How to avoid chasing the news
The first is really simple: think longer term. I understand that the promise of investing in cures for Ebola or MERS might seem like a winner for a few weeks or even months, but what happens when the prevalence of these somewhat rare diseases begins to die down? Your best course of action is to approach each trade with the mindset of holding for at least a couple of years. This way your investing thesis has time to play out, you can potentially take advantage of the effects of time and compounding, and when you sell you'll pay much less in capital gains taxes.
Secondly, think long and hard about the therapeutic indications that the biotech stock you're buying is targeting. Infectious disease companies targeting MERS and Ebola may be hit or miss, but chronic global conditions such as HIV/AIDS, influenza, hepatitis B, hepatitis C, cancer, and so on, offer an opportunity to cure millions upon millions of already infected people. Chronic disease drug developers may face plenty of competition, but most indications offer plenty of room for multiple therapies. As an example, with 180 million people infected worldwide, hepatitis C is an indication that could probably support a half-dozen approved products, or perhaps even more.
Finally, consider waiting for a biotech stock to prove its worth to investors. I can't recall how many times now I've witnessed a stock run-up 50%, 100%, or more following positive phase 1 or phase 2 data only to be decimated in phase 3 clinical trials or by the Food and Drug Administration. Waiting for the release of late-stage data or even an FDA drug approval may mean you miss an initial pop in a biotech stock, but it'll likely bring you better peace of mind and reduce your chances of losing money over the long run.
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The article The Single Greatest Mistake You Can Make When Investing in Biotech originally appeared on Fool.com.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong , and check him out on Twitter, where he goes by the handle @TMFUltraLong .The Motley Fool recommends Bluebird Bio. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
