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Investing In Biotech

This page is made for one purpose, to help people understand what it means to invest in biotech stocks. There are rules to follow for yourself, and others you may know who invest in biotech stocks!

  1. Manipulation – When you invest long term be prepared for complete manipulation of your stock. Regardless of your due diligence, and your patience there will be someone out there who will write a negative article while shorting the stock. Understand that this happens a lot in biotech stocks. These manipulators know how speculative these stocks are, and so they know that many investors will dump at the first sign of any negative article.
  2. Dilution – There are many instances when a biotech company is unable to partner or license out there technology to receive funding for other clinical trials. A lot of these companies are risky because of the need for cash, because there are no viable means of generating revenue. So these biotechs will be forced to sell more shares on the open market, unfortunately it causes a same day selloff in the stock. As I mentioned before you have to be able to stomach these drops. If you are a long term investor, then just like at times of manipulation, it is best to add more to your position if you are itching to buy more. Just know the money is necessary to run the biotech’s clinical trials, market the drug, and sell the drug to patients on the open market.
  3. Risk Factor– I’m not gonna sugar coat this sector like other websites on biotech do. I’m gonna tell the truth and tell it how it is! The biotech sector is one of the riskiest sectors to invest in. What you have to understand is the hurdles in biotech to get an idea why it is risky. For starters a biotech company has to run through three clinical trials: phase 1, phase 2, and phase 3 to be successful. Phase 1 is normally not a problem as it only tests for initial preliminary efficacy. At the point of phase 2 this is where a lot of biotechs fail, because the drug they have created fails to pass the placebo drug. Now that’s not to say just because it passed phase 2 that phase 3 is a 100% slam dunk, because it isn’t. I have seen in this biotech sector, where a drug makes it past phase 2 only to fail big in phase 3. The reason for that could be largely due to the fact that phase 3 sets greater endpoints to meet, and in phase 2 the FDA guides differently on the endpoints. Also phase 3 trials test more patients, so it is easier to see the real efficacy of the drug. Was that a lot? You bet it is! Still even after that there is still risk. You ask how? Well lets just say even if a biotech gets through all 3 clinical phase trials, they then have to present the drug to the FDA. The FDA will ultimately decide if the efficacy exceeds the safety factor. If the risk factor of the drug far outweighs the benefits then the FDA will be reluctant to approve. Bottom line is the FDA is unpredictable so you are playing Russian Roulette on the approval part of the drug. Lastly there is a chance where a trial gets halted, not because of efficacy. Sometimes if patients get seriously ill, or die from the drug then the FDA places what’s called a Clinical hold on the trial, until it investigates what has happened to the patients. Please when you research and invest in biotechs keep these risk factors in mind.
  4. Good news that doesn’t move the biotech stock up There will come times when a biotech company puts out a good press release, with outstanding results but the stock goes down anyways. Why does this happen? Quite simply there are a few reasons. The best thing to do is not panic, and analyze the results yourself for a few days. The first reason is day traders. They see a press release in the morning that is good news, and decide to get in on the trade. They are testing the waters to see if the stock will pop up. Next up is the kicker, if the day trader doesn’t see good movement they will dump their stock. As all the day traders dump the stock, the stock then falls of a cliff. Secondly a lot of people that are long, but decide to take half the profit or some off the table. The point is it creates a domino effect, because when longs see the money going down a lot they then decide to dump. The trick here as I mentioned is to remain calm, and understand what the results mean for the company’s bottom line. Understand why you invested in the first place based off of your due diligence, and not short term reaction.
  5. Insider Buying/Selling – I will say that insider buying/selling is not the best indicator for future success, but it should be a part of your due diligence investing in biotech stocks. There are times where a CEO or other insider buys a lot of shares continuously. It is not 100% telling, but it should be a good indicator that things are running along smoothly. At the same time an insider dumping huge amount of shares should be a cause for concern. Don’t get me wrong on this one though, a little insider selling (selling a small amount of shares) is nothing to be worried about. But if you see huge sales of stock coming in then you should be concerned. Understand that biotech investing is a mix of due diligence, and not just one event. But keep an eye on what the biotech stock is doing, and determine your best course of action to put your mind at ease.
  6. Risk of Biotech trading on OTC BB – (Over The Counter Bulletin Board) – Biotech stocks are risky as is, but when you add a new element it can get even riskier. So what is this new element that I speak of ? Well I’m talking about biotech stocks that trade on “Over the Counter Bulletin Board”. OTC BB is a lower level trading exchange, what makes this more risky is that stocks that trade on this exchange are more volatile. So what is so risky about this exchange? Let’s just say that there are more heavy short sellers and stock manipulators on here than one desires. What is the reason for this? Well OTC BB stocks have lower volume typically so that is a huge plus for heavy short sellers. They are able to easily manipulate the bid/ask price of a stock and play it like a fiddle. Another risky aspect is that most, not all biotechs, that trade on the OTC BB are behind on their SEC filings. The basic premise to learn here is that OTC stocks carry way more risks than higher level exchange stocks. For example big institutional investors like Fidelity, JPmorgan, Roth Capital, etc. aren’t allowed to buy OTC BB stocks. They also normally can’t buy stocks that trade below $5 sometimes. Just understand that there is heavy risk here. That doesn’t mean though to exclude it completely, because with due diligence you can find some diamonds that trade on the OTC BB exchange.
  7. Money Manager Manipulation – You normally don’t see it, but just because it is not seen does not mean it is not happening. Remember in the biotech world you have a limited amount of money to work with. Money managers work with millions of dollars. Sounds uneven right? Well yes it is, but remember just do your due diligence and remain strong. You will see days where money managers break up small bids/asks to keep the stock from moving as they accumulate shares. This happens all the...