BioInvesting Investing In Biotech This page is
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Posted On: 10/20/2015 12:40:27 PM
BioInvesting
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!
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.
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.
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.
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.
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.
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.
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 time! Sometimes they can even go as far as to drop the stock on purpose to take out peoples stop losses. Why would they drop it on purpose? Well they have the control of moving the stock whenever they want. Example: if a stock trades at $2 per share and has low volume, any money manager that comes in and brings the volume up big because they think the stock is undervalued, then the stock will skyrocket up. I have seen this lately on (IDRA) Idera Pharmaceuticals where it sat for months at .75 cents, and then boom one day it shot up 40% on no news. Do you honestly believe this move was all retail investors? I don’t think so, this was a money manager moving it up. Be cautious, but at the same time if you do your homework on the biotech stock and its technology you should be good for the long term.
Trials Take A Long Time – Going through all the trials take a lot of time. This is one thing you have to understand about the biotech sector. From Investigation in animals, preclinical work, phase 1, phase 2, phase 3, and FDA approval you are looking at 7-9 years. Yes it sucks, although now they have reduced some measures like Fast track approval, and other new regulations. Still, when you do your due diligence decide to go long on a stock until the trials are complete. It does suck to see the stock you invest in to sit at one spot for years, before it actually takes off like a rocket. I can give you one example that will make you understand! PCYC (Pharmacyclics Inc.) sat at $1 per share in 2008. Today PCYC trades at $130 per share, now imagine all those people who got impatient and sold out early, because they didn’t see movement. Like I have said before biotech long term investing is for those who can withstand the patience needed to make money. Now I’m not gonna claim that every biotech will eventually go up, it is not true. Some will languish low forever (sad I know), but you will never know unless you try.
Understand that Different dosages are tested for each trial– There are times where some trials (mainly phase 2 trials) are tested multiple times. What does this mean? Well sometimes a company will run 2 or 3 phase 2 trials at the same time, or one after the other. The reason for this is to determine the right dosage needed to go into the final phase 3 trial. Which is why sometimes you will see phase 2a, and phase 2b trials in press releases. This is not because the biotech is trying to drag out the process. This has to do with phase 2a testing out lower dosage, and then phase 2b testing out higher dosing. This is a good thing because when a biotech enters phase 3 they want to make sure they have the dosing right. If they go into phase 3 with a dose not high enough, or not good enough that’s when the trial collapses.
Reverse Stock Splits Happen – As I have stated many times biotech stocks are risky, but there are ways to mitigate the risk slightly by doing good due diligence. Understand though that the majority of the biotech stocks are listed on the NASDAQ stock exchange. Which means that there is the risk that trials will fail, causing the stock price to plummet below $1 per share. When this happens the company has a certain amount of time to try and get the stock price back above $1 per share. Unfortunately some biotechs struggle, and never make it over that $1 share price hurdle. Thus the only way to stay listed on the NASDAQ stock exchange is a reverse stock split. It is not fun, because the amount of shares you had gets reduced dramatically. There are times where you will find a biotech that trades on the NYSE or AMEX, in which case reverse stock splits are not necessary. This is because those exchanges don’t require a necessary share price to stay listed.
Small Floats Give Big Boosts – In the previous section I discussed about reverse stock splits, well there is a positive that comes out of a reverse stock split. When a biotech does a reverse stock split the float shrinks significantly. The good part about a small float is that the stock moves up more freely. There is not a lot of resistance, thus it is more probable for a stock with a small float to shoot up high in share price upon a positive press release.
Short Selling on biotech stocks– Over the years I have learned how the game is played. Yes the stock market is a game, and unfortunately we have to learn to play it. This is how money managers short stocks! One point to make before I mention how money managers manipulate stocks is to just stay out of the way. If you are long and comfortable ignore the game play! If you are short term you can ignore the game play as well just be cautious. Lets use an example: Lets say a stock is trading at $4 per share for instance, then a few days later climbs up to $6 per share. At this time lets say a hedge fund shorted the stock at $4 per share. On some stocks the hedge fund will lose if there is another money manager loading up shares. But if it is on a stock with a low volume count the hedge fund losing money on their short, will short the stock some more. You might ask why? Well to get the share price back below $4 per share so they can cover where they bought it. This way they don’t have to lose any money! You will see this often but if you are long term on a biotech stock it’s best to ignore. I just wanted to let you know that this type of manipulation exists.
Watch out for fake Tweets from Twitter/News from Facebook – What I’m talking about here is to watch out for fake tweets from Twitter, and news from any other untrusted sources. The problem nowadays is that social media has come in to our daily lives. We can’t ignore it, but therein lies the problem! This is something I added, because I want you all to be very careful on how you trade your news. First I will give you an example of what happened last year on Twitter. There is a biotech stock that I cover on my website that I like as a biotech pick known as Sarepta Therapeutics. What happened was last year an unknown individual posted a fake tweet, but did so posing as Citron Research which is a short selling firm. The individual put his name as citronresearc , without the “h” at the end. This caused a huge frenzy that day as Sarepta Therapeutics (SRPT) tanked 9% on the fake tweet. The fake tweet made up the fact that ” Sarepta therapeutics results were made up and doctored to look good”. One key takeaway from this rule is don’t trust tweets from Twitter, or news from Facebook. Too many times bad individuals with a hidden agenda will short a stock, then put out fake news to reap a lot of profits. If anything double check the news from a reputable source like yahoo finance, Cnnmoney, Cnbc.com etc. Those are sources that you can trust. Anything else is just noise, and should be taken lightly. Learn from this disaster that occurred, so that in the future you won’t sell your stock on fake news.
Pump and Dump Dilution By Company – At first you might be wondering would a company do this kind of thing to its own shareholders? Lets just say it’s not what the company wants to do, but has to do. Unfortunately at times when a company is low on cash, and they release very good results sending the stock soaring 50% or more, then be prepared for the company to create an offering for stock (dilution). This is what I mean by Pump and Dump! You have to understand that small cap biotech stocks have trouble raising money, so they need to go out and sell more shares to stay afloat. Unfortunately shareholders get hurt temporarily in the process. Notice how I said temporarily……………IMO it is a short term problem, so if you still believe in the company’s pipeline then it is a good opportunity to add more shares if you would like to. If not just ignore it and stay long term. I’m just pointing this out for those who are short term traders, that could possibly end up being stuck in this situation. Also for those who are unaware that this can actually happen to a biotech stock they own.
Upgrades/Downgrades – As always do your own due diligence. Don’t follow upgrades/downgrades by analysts as they may have some sort of hidden agenda. In a way it is kind of like the negative/positive articles where the writer is writing for their own personal gain. I have seen times where a biotechnology is downgraded by an analyst only to find that there was no reason for the downgrade. Yes……….this means that they are downgrading the stock to force a sell off so they can load the boat and buy more. If you have done your due diligence, and are happy with the long term prospects of the company then don’t bother following the advice of these analysts. They are just either stating an opinion, or they have some type of hidden agenda in mind. Same works for upgrades, ignore those too as the analyst may just be pumping the stock so they can either short it, or dump a lot of shares leaving investors holding the bag.
Presentations Tanking down the Biotech Stocks – As you know a lot of biotechnology companies like to go to JPM healthcare conference, Bio CEO& Investor conference etc. and present their companies. One problem typically is that a lot of short term traders play the presentation by buying up shares leading to the presentation. The problem with this is that at the time of the presentation, or after the presentation has finished investors dump the stock. This dumping causes the share price to tumble. So if there is good news why does the stock tank? Quite frankly profit taking, and investor sentiment. Many traders see it drop in price they panic, and sell. This creates a domino effect that I describe above in the other sections. The good news is that if you are a long term investor it is also another good time to add to your position. If you already have a good sizeable position in the biotech stock then relax and don’t panic. Don’t look at the day to day trading fluctuations, just know that 2 to 3 years later the stock will be up 1000% fold upon successful trials.
Biotech Sector Correction – There are other times where you will have an opportunity to add more shares if you are a long term trader or if you are a short term trader on a better pricing point to enter into. This happens when biotech stocks correct either because the valuations don’t match the potential earnings, or as an example when one biotech company puts out a drug that costs way too much and causes a big selloff in the sector. Like Previous postings in this section panic sets in and people don’t want risk anymore therefore they will sell off the biotech because of this sector correction. At that point like I have mentioned many times before it is a great opportunity to add to your current holdings/trade biotech stocks for short term gains.
Wall Street Stock Market Correction – As noted above biotech corrections is just one part of the equation, there is another phenomena known as “Market Correction” this takes place for all sectors and is a huge market sell off. The problem with this Market Correction is that it can occur for quite some time. So as before you have to make certain decisions? Are you happy with your current holdings if so hang on for the ride, if you are a short term trader you probably have stops set in anyways so you can wait till the entire market correction is done before entering a new position. Like everything else it just depends on your current investment thesis, everyone has their own investment strategy and should stick with it. Have faith in your ability to follow your strategy despite what others do. One big mistake is to play ” follow the leader” because sometimes you regret when you sold stocks when you know you shouldn’t have. Especially after they recover and then end up higher, the best course of action is to always stick to your plan.
High Frequency Trading – Has become a huge problem recently but investors must understand as of now it is not illegal . Therefore if you are a long term investor stick to your long term thesis and ignore the high frequency trading that occurs in the market. Short term traders you will just have to understand that you are at a disadvantage trading against computers. At the moment you just have to keep on doing what you are doing, or as a suggestion look to start investing long term in nice companies you like. Doesn’t necessarily have to be biotech stocks, you could purchase save dividend stocks and hold onto them long term as they pay dividends. The beauty of the stock market is you choose how you want to play the game even if sometimes there are players that play dirty. There are always a few players that have always had an advantage in the stock market, and until the SEC does something things may or may not ever change.
Biotech Stock Run-Up – What we mean by biotech run-up is the ability to capitalize on a biotech stock prior to it reporting phase 2 or phase 3 results! This is because investors and traders begin to accumulate a lot of shares potentially right before the biotech company is about to announce results of its clinical trials. Like all stock market investing it is risky because some biotechnology companies will run up ahead of results and others will not. But if you are not keen on holding through clinical trial data readouts because it’s too risky then you can go ahead and play the run-up to results instead. Sometimes you might make a lot of money on the run-ups and decide to keep half your winnings inside as a gamble. This is another tactic so you are playing with money you won, and not your initial investment money. Whatever the case may be this ability to play a run-up into results may be a safer alternative then holding through clinical results. But be aware though that you have to know when the results are expected and be ready to dip out way before they are announced if you are trading short-term. Long term shareholders in biotech companies will hold through the results anyways so it doesn’t matter for them.
Trial Results Shown At A Conference Presentation – There are a lot of biotech companies that wait to release positive results at certain conferences. This is to help create the positive reinforcement effect that the results of a trial are amazing and worth noting. I would say that a majority of the time a biotechnology company reports at conferences positive results, but there are those select few shall we say CEO’s that tend to over promise amazing results at a conference and then under deliver. Typically though even though the results aren’t that stellar by some of these CEO’s that report mediocre results at least it is just that mediocre results. We are inclined to state that it is highly unlikely for a company to report results at a conference for them to be very bad, just very highly not likely to be the case.
Riding The Hype Train – Once in awhile you will come across a biotechnology stock who rides on what I like to call the hype train. So what is the hype train? In essence it is what is the most looked at biotechnology stock. This can be due to many factors for instance the big thing in biotech now is NASH drugs ( short answer drugs that deal with healing a patients liver -non alcoholic reasons). For this reason a lot of stocks like LaJolla Pharmaceuticals (LJPC), Galectin Therapeutics (GALT), Conatus Pharmaceuticals (CNAT), Intercept Pharmaceuticals (ICPT) etc. all trade up high because this might be the next best thing in the biotech industry. Because of that these things start rising in share price based off of that expectation. Although you have to be careful with these stocks because if the hype dies down you can lose a lot of your money. I will add in one more example which is a current event: Tekmira Pharmaceuticals (TKMR) has been rising based off the premise that its experimental drug TKM-Ebola is the one being used to treat the current ebola victims in 2014. This stock started back at $13 to $15 a share where it dipped down from its highs of $30 per share, and is now currently at $29 per share almost back from where it fell based off ebola hype. Can it continue? It may possibly continue or it may not. It’s possible the TKM-ebola drug is not superior. The bottom line here is you have to be very careful how you play these hype stocks on current events.
http://www.biotechpicklist.com/bioinvesting/
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!
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.
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.
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.
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.
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.
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.
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 time! Sometimes they can even go as far as to drop the stock on purpose to take out peoples stop losses. Why would they drop it on purpose? Well they have the control of moving the stock whenever they want. Example: if a stock trades at $2 per share and has low volume, any money manager that comes in and brings the volume up big because they think the stock is undervalued, then the stock will skyrocket up. I have seen this lately on (IDRA) Idera Pharmaceuticals where it sat for months at .75 cents, and then boom one day it shot up 40% on no news. Do you honestly believe this move was all retail investors? I don’t think so, this was a money manager moving it up. Be cautious, but at the same time if you do your homework on the biotech stock and its technology you should be good for the long term.
Trials Take A Long Time – Going through all the trials take a lot of time. This is one thing you have to understand about the biotech sector. From Investigation in animals, preclinical work, phase 1, phase 2, phase 3, and FDA approval you are looking at 7-9 years. Yes it sucks, although now they have reduced some measures like Fast track approval, and other new regulations. Still, when you do your due diligence decide to go long on a stock until the trials are complete. It does suck to see the stock you invest in to sit at one spot for years, before it actually takes off like a rocket. I can give you one example that will make you understand! PCYC (Pharmacyclics Inc.) sat at $1 per share in 2008. Today PCYC trades at $130 per share, now imagine all those people who got impatient and sold out early, because they didn’t see movement. Like I have said before biotech long term investing is for those who can withstand the patience needed to make money. Now I’m not gonna claim that every biotech will eventually go up, it is not true. Some will languish low forever (sad I know), but you will never know unless you try.
Understand that Different dosages are tested for each trial– There are times where some trials (mainly phase 2 trials) are tested multiple times. What does this mean? Well sometimes a company will run 2 or 3 phase 2 trials at the same time, or one after the other. The reason for this is to determine the right dosage needed to go into the final phase 3 trial. Which is why sometimes you will see phase 2a, and phase 2b trials in press releases. This is not because the biotech is trying to drag out the process. This has to do with phase 2a testing out lower dosage, and then phase 2b testing out higher dosing. This is a good thing because when a biotech enters phase 3 they want to make sure they have the dosing right. If they go into phase 3 with a dose not high enough, or not good enough that’s when the trial collapses.
Reverse Stock Splits Happen – As I have stated many times biotech stocks are risky, but there are ways to mitigate the risk slightly by doing good due diligence. Understand though that the majority of the biotech stocks are listed on the NASDAQ stock exchange. Which means that there is the risk that trials will fail, causing the stock price to plummet below $1 per share. When this happens the company has a certain amount of time to try and get the stock price back above $1 per share. Unfortunately some biotechs struggle, and never make it over that $1 share price hurdle. Thus the only way to stay listed on the NASDAQ stock exchange is a reverse stock split. It is not fun, because the amount of shares you had gets reduced dramatically. There are times where you will find a biotech that trades on the NYSE or AMEX, in which case reverse stock splits are not necessary. This is because those exchanges don’t require a necessary share price to stay listed.
Small Floats Give Big Boosts – In the previous section I discussed about reverse stock splits, well there is a positive that comes out of a reverse stock split. When a biotech does a reverse stock split the float shrinks significantly. The good part about a small float is that the stock moves up more freely. There is not a lot of resistance, thus it is more probable for a stock with a small float to shoot up high in share price upon a positive press release.
Short Selling on biotech stocks– Over the years I have learned how the game is played. Yes the stock market is a game, and unfortunately we have to learn to play it. This is how money managers short stocks! One point to make before I mention how money managers manipulate stocks is to just stay out of the way. If you are long and comfortable ignore the game play! If you are short term you can ignore the game play as well just be cautious. Lets use an example: Lets say a stock is trading at $4 per share for instance, then a few days later climbs up to $6 per share. At this time lets say a hedge fund shorted the stock at $4 per share. On some stocks the hedge fund will lose if there is another money manager loading up shares. But if it is on a stock with a low volume count the hedge fund losing money on their short, will short the stock some more. You might ask why? Well to get the share price back below $4 per share so they can cover where they bought it. This way they don’t have to lose any money! You will see this often but if you are long term on a biotech stock it’s best to ignore. I just wanted to let you know that this type of manipulation exists.
Watch out for fake Tweets from Twitter/News from Facebook – What I’m talking about here is to watch out for fake tweets from Twitter, and news from any other untrusted sources. The problem nowadays is that social media has come in to our daily lives. We can’t ignore it, but therein lies the problem! This is something I added, because I want you all to be very careful on how you trade your news. First I will give you an example of what happened last year on Twitter. There is a biotech stock that I cover on my website that I like as a biotech pick known as Sarepta Therapeutics. What happened was last year an unknown individual posted a fake tweet, but did so posing as Citron Research which is a short selling firm. The individual put his name as citronresearc , without the “h” at the end. This caused a huge frenzy that day as Sarepta Therapeutics (SRPT) tanked 9% on the fake tweet. The fake tweet made up the fact that ” Sarepta therapeutics results were made up and doctored to look good”. One key takeaway from this rule is don’t trust tweets from Twitter, or news from Facebook. Too many times bad individuals with a hidden agenda will short a stock, then put out fake news to reap a lot of profits. If anything double check the news from a reputable source like yahoo finance, Cnnmoney, Cnbc.com etc. Those are sources that you can trust. Anything else is just noise, and should be taken lightly. Learn from this disaster that occurred, so that in the future you won’t sell your stock on fake news.
Pump and Dump Dilution By Company – At first you might be wondering would a company do this kind of thing to its own shareholders? Lets just say it’s not what the company wants to do, but has to do. Unfortunately at times when a company is low on cash, and they release very good results sending the stock soaring 50% or more, then be prepared for the company to create an offering for stock (dilution). This is what I mean by Pump and Dump! You have to understand that small cap biotech stocks have trouble raising money, so they need to go out and sell more shares to stay afloat. Unfortunately shareholders get hurt temporarily in the process. Notice how I said temporarily……………IMO it is a short term problem, so if you still believe in the company’s pipeline then it is a good opportunity to add more shares if you would like to. If not just ignore it and stay long term. I’m just pointing this out for those who are short term traders, that could possibly end up being stuck in this situation. Also for those who are unaware that this can actually happen to a biotech stock they own.
Upgrades/Downgrades – As always do your own due diligence. Don’t follow upgrades/downgrades by analysts as they may have some sort of hidden agenda. In a way it is kind of like the negative/positive articles where the writer is writing for their own personal gain. I have seen times where a biotechnology is downgraded by an analyst only to find that there was no reason for the downgrade. Yes……….this means that they are downgrading the stock to force a sell off so they can load the boat and buy more. If you have done your due diligence, and are happy with the long term prospects of the company then don’t bother following the advice of these analysts. They are just either stating an opinion, or they have some type of hidden agenda in mind. Same works for upgrades, ignore those too as the analyst may just be pumping the stock so they can either short it, or dump a lot of shares leaving investors holding the bag.
Presentations Tanking down the Biotech Stocks – As you know a lot of biotechnology companies like to go to JPM healthcare conference, Bio CEO& Investor conference etc. and present their companies. One problem typically is that a lot of short term traders play the presentation by buying up shares leading to the presentation. The problem with this is that at the time of the presentation, or after the presentation has finished investors dump the stock. This dumping causes the share price to tumble. So if there is good news why does the stock tank? Quite frankly profit taking, and investor sentiment. Many traders see it drop in price they panic, and sell. This creates a domino effect that I describe above in the other sections. The good news is that if you are a long term investor it is also another good time to add to your position. If you already have a good sizeable position in the biotech stock then relax and don’t panic. Don’t look at the day to day trading fluctuations, just know that 2 to 3 years later the stock will be up 1000% fold upon successful trials.
Biotech Sector Correction – There are other times where you will have an opportunity to add more shares if you are a long term trader or if you are a short term trader on a better pricing point to enter into. This happens when biotech stocks correct either because the valuations don’t match the potential earnings, or as an example when one biotech company puts out a drug that costs way too much and causes a big selloff in the sector. Like Previous postings in this section panic sets in and people don’t want risk anymore therefore they will sell off the biotech because of this sector correction. At that point like I have mentioned many times before it is a great opportunity to add to your current holdings/trade biotech stocks for short term gains.
Wall Street Stock Market Correction – As noted above biotech corrections is just one part of the equation, there is another phenomena known as “Market Correction” this takes place for all sectors and is a huge market sell off. The problem with this Market Correction is that it can occur for quite some time. So as before you have to make certain decisions? Are you happy with your current holdings if so hang on for the ride, if you are a short term trader you probably have stops set in anyways so you can wait till the entire market correction is done before entering a new position. Like everything else it just depends on your current investment thesis, everyone has their own investment strategy and should stick with it. Have faith in your ability to follow your strategy despite what others do. One big mistake is to play ” follow the leader” because sometimes you regret when you sold stocks when you know you shouldn’t have. Especially after they recover and then end up higher, the best course of action is to always stick to your plan.
High Frequency Trading – Has become a huge problem recently but investors must understand as of now it is not illegal . Therefore if you are a long term investor stick to your long term thesis and ignore the high frequency trading that occurs in the market. Short term traders you will just have to understand that you are at a disadvantage trading against computers. At the moment you just have to keep on doing what you are doing, or as a suggestion look to start investing long term in nice companies you like. Doesn’t necessarily have to be biotech stocks, you could purchase save dividend stocks and hold onto them long term as they pay dividends. The beauty of the stock market is you choose how you want to play the game even if sometimes there are players that play dirty. There are always a few players that have always had an advantage in the stock market, and until the SEC does something things may or may not ever change.
Biotech Stock Run-Up – What we mean by biotech run-up is the ability to capitalize on a biotech stock prior to it reporting phase 2 or phase 3 results! This is because investors and traders begin to accumulate a lot of shares potentially right before the biotech company is about to announce results of its clinical trials. Like all stock market investing it is risky because some biotechnology companies will run up ahead of results and others will not. But if you are not keen on holding through clinical trial data readouts because it’s too risky then you can go ahead and play the run-up to results instead. Sometimes you might make a lot of money on the run-ups and decide to keep half your winnings inside as a gamble. This is another tactic so you are playing with money you won, and not your initial investment money. Whatever the case may be this ability to play a run-up into results may be a safer alternative then holding through clinical results. But be aware though that you have to know when the results are expected and be ready to dip out way before they are announced if you are trading short-term. Long term shareholders in biotech companies will hold through the results anyways so it doesn’t matter for them.
Trial Results Shown At A Conference Presentation – There are a lot of biotech companies that wait to release positive results at certain conferences. This is to help create the positive reinforcement effect that the results of a trial are amazing and worth noting. I would say that a majority of the time a biotechnology company reports at conferences positive results, but there are those select few shall we say CEO’s that tend to over promise amazing results at a conference and then under deliver. Typically though even though the results aren’t that stellar by some of these CEO’s that report mediocre results at least it is just that mediocre results. We are inclined to state that it is highly unlikely for a company to report results at a conference for them to be very bad, just very highly not likely to be the case.
Riding The Hype Train – Once in awhile you will come across a biotechnology stock who rides on what I like to call the hype train. So what is the hype train? In essence it is what is the most looked at biotechnology stock. This can be due to many factors for instance the big thing in biotech now is NASH drugs ( short answer drugs that deal with healing a patients liver -non alcoholic reasons). For this reason a lot of stocks like LaJolla Pharmaceuticals (LJPC), Galectin Therapeutics (GALT), Conatus Pharmaceuticals (CNAT), Intercept Pharmaceuticals (ICPT) etc. all trade up high because this might be the next best thing in the biotech industry. Because of that these things start rising in share price based off of that expectation. Although you have to be careful with these stocks because if the hype dies down you can lose a lot of your money. I will add in one more example which is a current event: Tekmira Pharmaceuticals (TKMR) has been rising based off the premise that its experimental drug TKM-Ebola is the one being used to treat the current ebola victims in 2014. This stock started back at $13 to $15 a share where it dipped down from its highs of $30 per share, and is now currently at $29 per share almost back from where it fell based off ebola hype. Can it continue? It may possibly continue or it may not. It’s possible the TKM-ebola drug is not superior. The bottom line here is you have to be very careful how you play these hype stocks on current events.
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