3 Biotechs You Should Have Sold Years Ago

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Congratulations to Discovery Laboratories (NAS: DSCO) for sticking with Surfaxin. The Food and Drug Administration approved the drug on its fifth attempt earlier this month. Discovery Labs has been trying to get Surfaxin approved for so long that its first rejection was called an "approvable letter" before the FDA changed the name to a "complete response letter" a few years ago.

Condolences to investors that stuck with the company the entire time. Even with the doubling of the stock price this year, investors that held the entire time are sitting on a 98% loss.

Yikes!
The sad thing is that Discovery Labs isn't the only biotech in this situation.

EU officials recently signed off on Cell Therapeutics' (NAS: CTIC) non-Hodgkin lymphoma treatment, Pixuvri. But look at the 10-year chart and you'll see a 99.98% loss over that timeframe. Adjusting for all the reverse stock splits, Cell Therapeutics had the equivalent close above $6,000 per share a decade ago. Even if the FDA signs off on Pixuvri -- and that's by no means certain -- it may never get back to that level.

Last month, BioSante Pharmaceuticals (NAS: BPAX) gained FDA approval for Bio-T-Gel, which will be marketed by Teva Pharmaceuticals (NAS: TEVA) . Shares were up 61% on the news. Click the "All" button on the chart, though, and that gain quickly disappears, replaced by a 91% loss.

Drug development is expensive
Biotech valuations have come down a little over the last few years; both development-stage drugmakers and those with drugs on the market have been restrained of late.

But that isn't the main problem. While share prices of Discovery Labs, Cell Therapeutics, and BioSante have plummeted more than 90%, the market caps certainly haven't fallen that much. Investors just own a smaller piece of the pie because of capital-raising dilutions. Cell Therapeutics for instance, has over 1,600 times more shares outstanding than it did a decade ago.

Raising money is a necessary evil of the biotech industry and isn't a "sell" sign in and of itself. But investors should be leery of buying a biotech that's still years away from regulatory approval. It's almost guaranteed that company will need to raise funds to keep operations going, which will hurt current shareholders.

Sell and watch
When it becomes clear that it's going to take a lot longer than expected to get to the next value-adding event -- that the company isn't living up to its hype -- it might be wise to cut your losses and move on.

But that doesn't mean you should necessarily forget about the company. After all, you spent all that time understanding the company's technology. You're hopefully an expert on the company and should move it to your watch list after hitting the sell button.

The secret to the success of a sell and watch is knowing when to get back into the stock. There's no set formula; the timing is different for each company. But the more history you have with the company, the easier it will be to know when to pull the trigger.

A prime example is Human Genome Sciences (NAS: HGSI) , which tumbled during the post-genome craze period, finally landing well under $1 per share. But after two successful clinical trials and an FDA approval, the biotech soared some 6,300% from the low. Even with that gain, it was nowhere near its all-time high. But that didn't really matter to those who waited and bought in before the trial.

About that watch list...
The Fool has a free watch list service to help you follow your current holdings and those companies that aren't quite "buy" material just yet. Sign up for a free My Watchlist account and add Discovery Labs, Cell Therapeutics, and BioSante to it by clicking here.

At the time this article was published

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