Investing in Biotech is a unique endeavor because it is all about investing in future potential. This is probably the most volatile, risky yet rewarding sector. At least 70% to 80% of candidate drugs are rejected by the FDA for new drug approval. People talk about binary option when investing in Biotech because ultimately it comes down to either Yes or No approval from the FDA. So why invest in Biotech? Who wants to invest in something where the odds are seemingly against you?

Despite popular believe, investing successfully in Biotech is not necessarily dependent on drug approval by the FDA. Of course, approval by the FDA means hitting the ultimate jackpot and you will be banking lucrative profits. Your investment can double-triple in profits based on good clinical data alone before it even gets approval. For example, Celator Pharmaceuticals (CPXX) was sitting at $1.49 March 10,2016 and eventually announce some positive data for its Leukemia drug candidate Vyxeos. On July 12, 2016 the stock price closed at $30.25 after announcing a buyout from Jazz Pharmaceuticals. Basically, your investment in Celator Pharmaceuticals became a 20x bagger before any FDA approval!! Your investment in biotech becomes very profitable with good clinical trial data and potential buyout from bigger company and not just dependent on FDA decision.

Picking profitable biotech stocks is not easy but there are important criteria that will help improve your decision making. Here are important factors to consider when deciding to invest in biotech companies.

Must have diverse pipeline. Try to select companies with at least 2 different investigational drugs in clinical trials. I like to pick companies with multiple drugs targeting different organs or disease states.
What type of market will the new drug treat is important. Candidate with orphan drug status targeting rare diseases can have more market exclusivity, larger profit potentials and faster track FDA approval process. Treatment for cancers, heart diseases, diabetes, viral infections (HIV, Hepatitis, Zika) neurological immunological disorders are much more sought after by both patients and big pharmaceutical companies.
Collaboration/Partnership is a big plus. Having partnership with a big pharmaceutical company can provide financial stability and operational support. It also says something about the potential product of a small biotech company for a large cap company to want to get involved with them.
Look for companies with good capital structure. Clinical trials and overall research and development (R & D) is expensive and will cost millions of dollars per quarter. Make sure the company is not crippled with debts to avoid possible dilution and share offering. Ideally, the company should have at least 2 years of cash reserves to cover operational cost. Revenue is not as important as cash equivalents available.
Insiders buying or selling. Most biotech companies are run by scientists or doctors. They have the clinical knowledge to understand clinical trial data better than the public. Management will know more about the progress of their drug candidate so what they do with their own company stocks can hint at potential success or red flag of potential failure.

What you need to know before investing in biotech stocks

Dr. Phil Bui, Pharm.D

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