The world of biotech investing is exciting and volatile. People have seen their savings triple in value overnight, but also disappear just as quick. Unlike other stocks which generally move according to standard ratios (EPS/PE/P&L etc.) biotechs tend to move mostly due to sentiment and of course FDA approvals.
The approval of a drug can sky-rocket a stock overnight; however, few investors actually realize how low the approval rate actually is. It is estimated that only 1 out of 15 drugs actually manages to capture that luxurious final approval. Many Biotech investors will actually never stick around to hear if a drug is approved or denied. They would rather invest in the period leading up to that approval based on market sentiment.
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Here are three ways to become a better biotech investor
Step 1: Understand the FDA’s approval process
This is perhaps the most critical of all, and without being very familiar with this process you are basically playing bingo blind. The average drug will take years of testing before submitted for approval, regardless of how promising it is. Phase 1 of testing, which takes approximately 1 year, will test 20-80 healthy individuals to determine the dosage and safety of the drug. Phase 2 already tests 100-300 patients suffering from the target disease, with the goals of gaining an initial understanding of effectiveness and potential side effects. This step alone can take up to 3 years to complete. The final and most extensive phase tests between 1000-5000 patients, with some acting as a control group (don’t actually receive the drug).
Biotech companies will generally publish what is known as a pipeline, a list which describes the current stage of each drug in development. Below is an example of their current pipeline and drugs in development.
Step 2: Use a free resource to find out the next FDA announcements
You can Google “FDA Calendar” and see various websites offering a descriptive breakdown of important upcoming FDA dates. Biopharmcatalyst.com appeals to many investors for its very clear layout and informative notes. You should consistently check the FDA calendar to see if and why your investment is on it, as well as the potential implications of the decision. Another helpful feature on the calendar is the notes, which link to the original press release. This gives you a direct source to where the information was gathered in order to verify and learn more about the announcement. Another alternative tool is the FDA Tracker which lists similar data in calendar form.
Step 3: Gather reliable information
Investing in Biotech stocks is hard. One of the main reasons is the human emotions of greed and fear simply becoming overwhelming. Every biotech investor has experienced a 20% gain and failed to take the profits out due to greed, only to see his investment plummet to a negative return. Similarly, many have made solid investments based on strong research but dropped the stock after losing 10% due to fear, only to see the stock soar 50% a day later.
One way to navigate through this sector is to use a reliable outside source. At SmarterAnalyst, with the assistance of the TipRanks financial algorithm, we have built an all-around biotech portfolio. BioPortfolio is a 2 long one stock continuous portfolio that rebalances each week based on the most extensive data regarding market sentiment available. For example, on November 11, 2013, the BioPortfolio recommended short selling Sarepta Therapeutics, a recommendation the yielded investors over 50% over a one week time frame.
The model profits in both a bull and a bear market, and has shown to be reliable when measuring risk to return. Since its launch, the portfolio has grown 10x its original value. You can find out a lot more information about this project HERE.