Biotech Investors: Be Careful Who You Listen To

Without a doubt, the easiest way to become a better biotech investor is to seek out as many different opinions as you can find on companies and the drugs they're developing.

Just make sure you're careful and question their motivations. Here's a look at some of the key players in the dispersal of information.

Why they're important:
They'll be the ones prescribing the drugs. If doctors don't think highly of the drug, it's not likely to get much traction.

But be careful: Doctors are often paid by drug companies to advise them and participate in clinical trials. For instance, in this video, Dr. Jay Skyler touts rapid acting insulins including MannKind's Afrezza and Halozyme Therapeutics' analog insulin PH20. But Skyler is a unpaid scientific advisor for MannKind and has participated in trials testing Halozyme's insulin, so it's hard to say exactly how much credit we should give to his endorsement.

Why they're important:
Patients taking drugs know firsthand the efficacy and safety they experience. If you look hard enough, you can usually find someone on the Internet who says they're enrolled in the clinical trial testing the drug you're interested in. After a drug is approved, it's even easier to find patients.

But be careful: A couple patients' experiences aren't likely to give a picture of how the drug is performing for all the patients in the trial, which is how the FDA determines if the drug is successful. Arena Pharmaceuticals' Belviq, for instance, caused 10% weight loss in 22% of the patients enrolled in its clinical trials, but the average patient lost just 5.8% of his or her body weight.

There's also the issue of the anonymousness of the Internet. Just because a person claims to be a patient doesn't mean that is true. Investors asked Jenn McNary, whose son is enrolled in Sarepta Therapeutics' phase 2 trial testing its Duchenne muscular dystrophy drug eteplirsen, to prove that her son was actually enrolled. I'm sure she was annoyed by the request, but given the miraculous claims she's making about how eteplirsen has helped her child, investors were right to ask.

Why they're important:
Analysts often have access to management that the average investor doesn't. For instance, when Gilead Sciences sued Merck a few weeks ago, as a pre-emptive strike asking the court to rule that its hepatitis C drug sofosbuvir didn't infringe on Merck's patents, the news reports I saw were based solely on the lawsuit.

Robyn Karnauskas from Deutsche Bank was able to talk to Gilead's management, confirming that management remains confident that it has sole rights to sofosbuvir and that "Gilead has not engaged in any settlement discussions with Merck."

But be careful: Investment banks make money helping companies raise capital through secondary offerings, producing a conflict of interest. A higher stock price -- fueled by an analyst's bullish opinion -- benefits-helps the biotech raise more capital.

Why they're important:
Articles offer the gamut of new ideas, in-depth coverage, reporting of news, and predictions of upcoming events. Depending on the source they may be opinionated, but even if they're taking the opposite view, it's important to understand the author's thesis. There are always two sides to the story -- after all, every market price is set by a buyer and a seller.

But be careful: We're not always right. Fortunately, opinions are usually easy to identify, so verify the author's thesis as part of your due diligence.

Where investors can run into trouble is opinion masquerading as news. The worst offenders are unnamed sources claiming inside knowledge of the acquisitions. For instance, Bloomberg reported last week that Clovis Oncology was "exploring strategic options including a sale of the company." Investors bought in, sending shares higher until yesterday when Bloomberg announced that the company "hasn't received any interest from buyers."

CLVS Chart
CLVS Chart

CLVS data by YCharts.

While there's nothing wrong with reporting the news, investors wrongly assume that if a company is getting put on the block, a sale is inevitable. Even when there's another party mentioned, investors should be cautious; it seems like Roche is rumored to be buying a different company each week.

Why it's important:
The speed at which Twitter spreads news items and varying opinions make it a one-stop shop for gathering information about the industry.

But be careful: Twitter is only as useful as the people you follow. There's some evidence that people tend to follow pundits who are the most opinionated more than the ones who are most often right.

Read and verify
That's the take-home message.

Now go find an article that confirms or denies my assertion in this piece.

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The article Biotech Investors: Be Careful Who You Listen To originally appeared on

Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences. 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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