Investing lesson I in 2010: pharmaceutical stocks

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Maybe speculation lessons will be more appropriate. I bought 3 pharmaceutical stocks recently. With the outcome of MA senate race, US healthcare reform is unlikely be massive, which is good news for the pharmaceutical companies. I learned some lessons in the short span of trading small pharma stocks. I think it’s a good idea to summarize here:

1) Pay attention to the trial phase of drug under development: Typically the earlier in phases, the more risk, sounds simple both from common sense and probablity point of view. Apply this to real world, for Athersys (Nasdaq:ATHX) all drugs are in phase I or earlier. On the other hand, pSivida (Nasdaq:PSVD) has drugs are in all phases (from preclinical, phase I, II and III and marketed); 4 out of 5 drugs from Lexicon (Nasdaq:LXRX) are in phase II.

2) Sell on the news, this happens to all the small pharma, and this hit particularly hard on ATHX. The stock hit a jackpot after the Pfizer news on Dec 21, 2009. Then it started the downward trend: from as high as $6 back to $2.75, an almost round trip.

3) Time horizon. I don’t have data yet, but I think it takes years (10 years) to develop a drug in the US. Most small pharmas will hit jackpot, just like most lottery ticker buyers.

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