Dear Mr. Berko: Please tell me about Chimerix, which sells for $42. My broker says this is an “excellent speculative stock,” and he’s very enthusiastic about it. He wants his clients to own it and wants me to buy 1,000 shares on margin. Please explain margin, as I don’t understand how it works. My individual retirement account is worth $191,000. He suggests that I borrow $42,000 from his brokerage, using the stocks in my $191,000 IRA as collateral, and then buy 1,000 shares of Chimerix, which he believes will double in less than a year.
— NC, Port Charlotte, Fla.
Dear NC: I think this jerk ought to get a job cutting holes in Swiss cheese. This wouldn’t be a suitable investment for you.
Chimerix (CMRX-$42) is among the thousands of biopharmaceutical companies that develop, discover and commercialize unique antivirals and then search the world for new diseases their drugs can cure. CMRX came public at $15 in early 2013 with zero revenues, rising steadily to $24 a year later. Then, as the Ebola virus started making headlines worldwide, frenzied traders began circling CMRX, pushing it above $42. They suggest that its new antiviral, Brincidofovir, will cure the Ebola curse.
But CMRX, like most of these development-stage biopharmaceuticals, has significant overhead costs (staff, rent, utilities, equipment, etc.) and burns through money like the Pentagon. Last November, CMRX had to raise $105 million of new money via a secondary offering of 2.5 million shares. How can a company with hundreds of millions in losses have a market cap of $1.55 billion (37 million shares times $42)?