The truth about biotech stocks : Plenty of traders are interested in learning about sectors that have the potential to grow their account quickly.
Of course, it’s important to state from the outset that the same sectors that can offer high rewards often carry a high level of inherent risk. With risk can come reward, but it can also drain your account quickly. That is to say: you can profit from riskier trades, but you need to be willing to lose, as well.
This post focuses on a popular high risk/reward sector: biotech stocks. You’ll gain an overview of what makes this sector tick, so that you can make more informed decisions and know about some things to look for to mitigate risk.
What Are Biotech Stocks?
Biotech stocks that relate to the healthcare industry.
Specifically, they are companies that are involved in projects like developing new drugs, vaccines, gene therapy, and tissue replacements.
In their early years, companies like this have sky-high costs related to the all-important research and development (also called R&D) and clinical costs. However, while they have very expensive operating costs, they’re making little to no money.
As such, they have to constantly raise cash or forge partnerships with bigger companies to continue their development process.
In these early days, shares are often quite cheap. Many traders are lured in by the dazzling prospect of buying low and potentially selling high later on.
However, it’s not always quite so simple.
These stocks might offer high rewards in the future, but the future remains uncertain, and that makes them very risky.
Often, these stocks are driven by catalysts, particularly the results of clinical drug tests. They have the potential to appreciate in value based on the results.
If you decide to buy stock in a biotech company, you must be prepared to stay on top of the company’s cash needs and cash expenditures for their trials from SEC filings.
Largest Biotech Companies
Curious about some examples of large biotech companies? Here are a few industry leaders:
Regeneron (REGN): Based in Tarrytown, NY, Regeneron has 7,400 employees and a market cap of $46 billion. They engage in the discovery, research and development, and commercialization of medicines for serious diseases. Their products include Dupixent, Praluent, and ZALTRAP.
Exact Sciences (EXAS): This Madison, WI biotech company may only have a little over 1,200 employees, but has an impressive market cap of $11 billion. They focus on the detection and prevention of colorectal cancer, and are known for their proprietary technology for such screening.
Amgen (AMGN): This Thousand Oaks, CA biotech company has over 20,000 employees and a market cap of over $118 billion. They engage in research and development and manufacturing and marketing of therapeutic products, including EPOGEN, Neulasta, and XGEVA.
Gilead (GILD): With 10,000 employees and a market cap of $84 billion, this Foster City, CA operation is certainly not small potatoes. They engage in the research and development and marketing of antiviral medicines and products including brands like Ranexa and Zydelig.
Biotech Penny Stocks
What about some of the smaller guys? Here are two examples of low-priced biotech penny stocks. As you can see, partnerships and collaborations are common:
AEterna Zentaris (AEZS): With 34 employees and a market cap of $67 million, this is a small operation. They engage in the development and commercialization of products relating to endocrinology and women’s health.
They have active licensing and collaboration agreements with larger companies, and at least one product which has reached Phase 3 in the drug approval process.
Novelion Therapeutics (NVLN): This Vancouver, Canada-based company has 180 employees and a market cap of $24 million. They focus on standards of care for those living with rare diseases, and recently enjoyed a surge in stock price thanks to playing part in a licensing agreement for the drug JUXTAPID in Japan.
Drug Approval Process
When it comes to biotech stocks, the FDA approval process is a key factor in price movement (in both directions). It’s very important to understand the phases of the approval process, and to keep track of what phase the company in question is currently in, and how things appear to be going.
Here’s where you can really get an idea of the risk involved with these stocks. Even after the years-long process of testing a drug, only 1 or 2 out of 20 drugs will ever get final approval. Approvals along the way can make stock prices pop in a big way, where failures can make a stock sink in record time.
Here’s an introduction to the three phases of the FDA approval process:
Once again, I need to stress the risk involved here. Even after the arduous, years-long process of testing a drug, only 1–2 out of 20 drugs that enter this process will get final approval. Here are the phases as dictated by the FDA:
Phase 1 (Safety Testing)
The first phase of the FDA approval process involves testing the product on 20–80 healthy individuals (sometimes, animal testing takes place, too). This phase is designed to determine the safety and dosage for the drug, and takes about one year.
What Traders Should Watch For
Watch to see what the results are here: If the drug passes Phase 1, the stock can experience a spike. However, be warned that these spikes can be short-lived.
Phase 2 (Efficacy)
The second phase is performed on 100–300 patients suffering from the particular condition or disease that the drug is intended to help alleviate. During this phase, the effectiveness and potential side effects are explored. This process takes 1–3 years.
How Traders Can Win (or Lose) Big
People start taking the drug more seriously at this point. Success in Phase 2 can cause a bigger and longer-lasting price increase in the stock.
To stay on top of these opportunities, keep track of how long the phase is going to last for the company in question, and be sure to look at their financials.
Phase 3 (Clinical Testing)
Nope, it’s not over yet.
Phase 3 is the biggest and most serious one yet. Here, 1,000–5,000 patients suffering from the condition or disease are involved. This phase tracks side effects that come with long-term use of the drug. Some patients will receive the drug, but others will receive a placebo to test the effectiveness. This phase is extremely strict and challenging, and lasts for 2–3 more years.
What Traders Need to Watch During Phase 3
Passing Phase 3 is a big deal that can cause big spikes in stock prices. However, you always need to look at the company’s bottom line, because if they are ailing, the price increase may not play out as you’d hope.
Important Biotech Conferences
Like many other industries, big announcements that can move stock prices often occur at conferences within the biotech industry.
Some conferences to follow include the JP Morgan Healthcare conference and the ASCO conference. By staying on top of the news associated with these conferences, you may be alerted to future trading opportunities.
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Have you ever explored trading biotech stocks? What has been your experience? Leave a comment and let me know!