Half-Wit Bureaucrats Serve Up a No-Brainer Biotech Trade

Half-Wit Bureaucrats Serve Up a No-Brainer Biotech Trade
By Dr. George Huang, editor, S&A FDA Report
November 27, 2009

I'm a volatility junkie. I admit it. Hundreds of percent, one-day stock moves get my heart racing. And only one sector in the market continually provides my fix: biotech.

Of course, the reason biotech traders enjoy such massive stock moves is the U.S. government, specifically, the Food and Drug Administration (FDA).

Last month, I outlined five upcoming FDA decisions that should have ignited fireworks. But for the most part, the pyrotechnics didn't happen. FDA bureaucrats decided to postpone the show until the first quarter of 2010.

The agency did make one decision that could lead to a huge trade. But before I get there, let me back up a bit...

Every prescription drug needs to win the FDA's approval before landing on pharmacy shelves. Securing that approval isn't the most difficult part of the decade-long process of bringing a new drug to the market. But it's certainly the most visible.

A rejection can send a stock tumbling as much as 90% in a single day. And positive news, particularly when it's "unexpected," can send stocks soaring as high as 1,000%.

That kind of volatility can make speculators a fortune. But trading prior to an FDA decision has become a very difficult way to make a living...

Drugmakers pay an average $1.4 million for the privilege of submitting their data to a bunch of government half-wits. In exchange, the FDA accepts the legal obligation to review the drug in a timely manner. Unfortunately, the FDA has a bad habit of missing its own deadlines.

For example, the FDA pushed back three of the five decisions I previewed last month. Xenoport, Cadence, and Acorda all received three-month delays... and they got off easy. The agency missed deadlines for drugs by Auxilium and Novo Nordisk without providing any timetable for a decision. (I guess $1.4 million just doesn't buy you many government favors these days.)

Missed deadlines can destroy trades aiming to profit from a big stock move. So, as I've written before, I prefer to wait for an FDA decision before jumping in. One of my favorite trades is to watch an FDA rejection crush a quality stock... and then scoop up shares at a discount. A 10-year back study showed this strategy can return up to 50% annually.

One of the decisions I pointed out last month may be shaping up as a big opportunity. The FDA rejected (on time!) biotech behemoth Amgen's osteoporosis drug, a potential blockbuster called Prolia. Amgen's stock took a 15% dive to $52 before stabilizing around $55 per share.

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At $50, Amgen would be trading for less than 10 times free cash flow. Even now, the stock is cheap. I expect Prolia to win approval late next year, which should send shares above $60.

I thought the setback would give us a golden chance to catch Amgen below $50. It hasn't happened... yet. But I think the rejection plus even a small market correction could send the stock to our target. At that level, we can make a conservative 20%-30% return on a no-brainer trade.

Good investing,

George Huang

P.S. I just found a super-safe biotech trading at insanely cheap valuations. Right now, the stock is trading at an absurd 20% discount to liquidation value. It has a royalty stream that provides iron-clad downside protection. So the risk of any loss is miniscule. And I believe we can safely make 50% by next March. Click here to learn more about my FDA Report.

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	Last	Change	52-Wk
S&P 500	1109.30	+1.45%	+27.03%
Oil (USO)	40.29	+2.99%	-12.75%
Gold (GLD)	111.63	+1.72%	+52.29%
Silver (SLV)	18.01	+5.01%	+92.41%
U.S. Dollar	75.37	+0.68%	-13.15%
Euro	1.49	-0.70%	+17.54%
VIX	22.89	-2.01%	-65.48%
HUI	475.53	+3.26%	+155.07%
10-Year Yield	3.33%	-0.10	-0.37

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Company	Sym	Industry
Vale	VALE	steel
Deutsche Telekom	DT	wireless telecom
Kimberly-Clark	KMB	medical supplies
Duke Energy	DUK	utilities
Reynolds Am	RAI	cigarettes
Centurytel	CTL	telecom
Rockwell Collins	COL	defense
DTE Energy	DTE	utilities
MeadWestvaco	MWV	packaging
Petrobras	PBR	Big Oil
Banco Santander	STD	bank
Bristol-Myers	BMY	Big Pharma
National Grid	NGG	utilities
Kellogg	K	packaged foods
Sempra Energy	SRE	utilities
NetApp	NTAP	data storage
Pepsi Bottling	PBG	soft drinks
Varian Medical	VAR	medical devices
Google	GOOG	online search
Total	TOT	Big Oil
SPDR Gold	GLD	gold fund
PNC Financial	PNC	bank
HDFC Bank	HDB	bank
ConEd	ED	utilities
Xcel Energy	XEL	utilities
Randgold Res	GOLD	gold mining
ONEOK Partners	OKS	pipelines
BHP Billiton	BHP	mining
China Life	LFC	life insurance
Diageo	DEO	liquor
Prudential	PUK	life insurance
Stryker	SYK	medical supplies
Zimmer Holdings	ZMH	medical devices
Yanzhou Coal	YZC	coal mining
Penn West	PWE	oil & gas drilling
CareFusion	CFN	medical supplies
Procter & Gamble	PG	toiletries
Novartis	NVS	Big Pharma
An-Busch InBev	BUD	beer
Philips	PHG	electronics
Staples	SPLS	office supplies
Intl Paper	IP	paper products
Forest Labs	FRX	pharma
Amerisource	ABC	pharma
Silver Wheaton	SLW	silver mining
Johnson & Johnson	JNJ	Big Pharma
GlaxoSmithKline	GSK	Big Pharma
MedcoHealth	MHS	pharma
Covidien	COV	medical supplies
Kinder Morgan	KMP	pipelines
Coca-Cola FEMSA	KOF	soft drinks

Company	Sym	Industry
Smithtown	SMTB	bank
Citizens & North	CZNC	bank
Invitel Holdings	IHO	telecom

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