E-motions: Vol. No. 1, Issue No. 15 Brought to you by California News Tech (OTC BB: CNTE)

By: Tai Nicolopoulos E-Motions Writer 11/14/2005

Average Pharmaceutical Investors Under-Estimate the Power of the FDA

1. Emotions in Focus: Individuals Make Poor Estimates About Complex Processes

    At various points in recent market history, biotech and biopharmaceuticals, tech-anything, really, have been touted as great investment bets. Biopharmaceuticals still can be a smart move, but over time investors have discovered certain caveats about biotech and pharmaceuticals. The obvious lesson from the tech bust of early 2000 is that it is wise to consider whether a company actually has a line of products ready for the market, or is merely in the research and development phase with uncertain results. A more recent lesson comes from major scandals in the pharmaceutical industry involving Food and Drug Administration rejected drugs and late emerging safety concerns about medications ranging from diet pills to pain relievers to erectile dysfunction treatments.

    Now investors are beginning to realize that even if a drug has a successful marketing campaign and millions of people seem ready to part with large sums of money in exchange for relief, problems can still arise. With FDA drug approvals sometimes moving at a glacial pace and many companies in ongoing litigation over post-FDA approval discovery of drug safety concerns, many investors have become skittish. Their anxiety, however, may actually make them too short-sighted.

    These days, when ever there is a news event reporting that a biotech or pharmaceutical company must go through more rounds of FDA investigation, or that it has entered into a period of costly research and development, some investors seem to panic. The reality, is however, is that they are likely being unrealistic about what cycles of drug creation, production and distribution actually look like. The pattern seems to be that investors get very excited prior to an earnings release or other news event, based on gossip surrounding a new drug or set of trials, but then experience a let down when the costs of research and development or approval set backs become apparent. In short, because of heavy government regulation, pharmaceutical and biotech companies do not operate like businesses in other sectors. While many quarters such companies are wildly profitable, sometimes it’s next to impossible to turn a profit with so many restrictions, research costs and lawsuits. Other times, pharmaceutical companies are still making a stiff profit on pre-existing drugs and patents even when a new drug is circulating bad buzz, and price to earnings ratios get lower and lower. Investors sometimes do not take full advantage of the cyclical nature of stock prices in this industry, missing buying opportunities out of short-sighted anxiety or ignorance. Meanwhile, drug companies themselves grow richer, and even the FDA receives huge benefits in the form of contributions from big pharma for clinical trials and other aspects of the approval process.

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2. The Big Movers and Why

    For the week of October 31st through November 4th, a number of stocks dropped dramatically in value after releasing earnings reports. Each of these three stocks happened to be a biotech or pharmaceutical company involved in cancer research and treatment. Martritech, Inc., (Amex: MZT), which specializes in cancer diagnostics, went down -27.96% the day after releasing earnings at 6:48 AM EST on November 1st, 2005. AVI Biopharma, Inc. (Nasddaq: AVII), which produces cancer drugs, including a number of important treatments for colon cancer, went down -16.07% after releasing earnings at 5:23 AM EST on November 4th, 2005. SFBC International, Inc. (Nasdaq: SFCC), which conducts clinical trial testing for pharmaceuticals went down -27.05% after releasing earnings at 9:34 AM EST on November 3rd, 2005.

    Both Martritech, Inc. and AVI Biopharma, Inc. had been experiencing hold-ups with FDA approvals and extended clinical trials of their cancer treatments, and AVI Biopharma, Inc. also experienced delays in its FDA-approved research funding. Meanwhile, SFBC International, Inc.’s clinical testing facilities and procedures are under a costly FDA review. These companies all have had in the past and will continue to have in the future viable products and services, but did not do as well as expected in Q3 because of FDA imposed set backs. While pharmaceutical sector insiders may understand that a pharmaceutical company with profit viability that is a good long term hold may experience quarters at a time where there are losses, or other set backs. Other groups of investors who do not understand the structural adversities of the drug industry however may experience more anxiety and get out of investments too soon.

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3. How to Use the News

    In general, when pharmaceutical companies release poor earnings statements, it is a good idea to look closely for buying opportunities. While some pharmaceutical companies experience set backs that are not likely to reverse themselves, such as rejected drugs, unprofitable products, or very high costs, other companies are merely experiencing a quarter with inevitable research and production slow-downs based on FDA bureaucracy. Some of these companies are producing drugs with quite the potential for eventually making large profits, such as cancer treatments and cures for other common and life threatening conditions, even if they are currently losing companies’ money.

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4. Last Week in Media Sentiment

    Recent correlations between MediaSentiment.com's thumbs up / thumbs down recommendations for Heads Up™ rated companies and subsequent day price highs and lows show a strong relationship. The correlation between ratings for MediaSentiment.com selected stocks and their highs and lows the next day is 79%. Therefore, this week, MediaSentiment™ gave an edge up to 79% to smart investors who used Heads Up™ recommendations to trade on intraday volatility!

    All figures reflect all MediaSentiment Heads Up™ recommendations for the week of October 31, 2005 through November 4, 2005, rating companies on the day of their quarterly earnings releases correlated with their stock highs, lows, closing prices and daily volumes for the subsequent day.

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5. Links you can use

FDA: Cozy with Drug Companies
Top-Flight Drug Makers Have Patents, Pipelines