Did You Lose Your Shirt On This Trade?

| May 6, 2010 | 0 Comments

The FDA sent a harsh reminder to investors the other day.  The regulatory agency made it absolutely clear… just in case anyone had forgotten…

There’s no such thing as a sure thing in the market.

What am I talking about?

I’m referring to the FDA’s shocking decision on InterMune’s (ITMN) lung drug, pirfenidone.  Nearly everyone believed FDA approval of the drug was certain.  I guess someone forgot to tell the FDA.

They denied approval.

The drug would have been the first treatment for a chronic lung disease called idiopathic pulmonary fibrosis.  The disease affects over five million people worldwide.  And, there’s no cure or satisfactory treatment.

Just two short months ago, FDA approval of pirfenidone seemed like a sure thing.  After all, the FDA advisory panel recommended approval by a 9-3 margin.

The FDA usually follows the advice of the advisory panel but they aren’t required to.  This is one of those rare instances where the FDA ignored the panel.

Why did they deny approval?  They’re not convinced pirfenidone is effective.  They want InterMune to conduct another clinical trial to prove the drug’s efficacy.

To say the FDA’s decision surprised investors would be an understatement.

You can see how the shares soared in early March following the advisory panel’s decision.  The shares jumped 59% on the news.  Then two days later, ITMN surged another 65%.

All in all, the shares soared 163% in just three days!

And, they weren’t finished by a long shot.

Over the next several weeks, ITMN steadily climbed to a high of $49.46.  That’s a whopping 238% gain from where the shares were trading the day before the advisory panel’s decision.

Then disaster struck!

After the market closed this past Tuesday, the FDA issued its decision.  The shares immediately plunged in the extended market session.

Then, yesterday morning the shares opened at $10.06.  They traded as low as $9.75 before rallying to close at $11.38.  The former high-flyer had fallen a mind boggling $34.06 or nearly 75%!

Needless to say, a good many investors suffered huge losses.

Especially investors who bought ITMN after the advisory panel decision.  Many thought they were buying shares of a sure thing.  They thought they had a stock guaranteed to post a big profit when the FDA approved pirfenidone.

Instead, they got taken out to the woodshed.

The good news is no Dynamic Wealth Report readers should have suffered any losses.  You might remember my article of March 22nd on InterMune, “It’s Good For A 216% Gain…”  I urged readers to book their profits.

Here’s what I said exactly…

Now that most of the gain has been captured, the risk reward profile on the stock has changed.  No sense giving up our big gains, just to collect pennies of upside.

Now’s the time to lock in our big gain… it’s never a bad idea.

While InterMune may be on the path to bigger and better things, it’s time for us to say goodbye to this pick!

Remember, I had recommended ITMN in January 2010 through my Special Report, How One Stock Can Make You A Millionaire (and where the next one is).  At that time, ITMN was trading around $13 per share.

Congratulations to all of you who took my advice!

You booked gains of 216% or more.  And, you learned a valuable lesson about trading biotech stocks.

When a biotech stock soars, don’t wait around to take your profits.  With so much uncertainty surrounding experimental drugs, you never know if or when a biotech stock will plummet.

What’s happened with ITMN is a textbook example… and something we can all learn from.

 

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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