How to Find Winning Biotech Stocks
by Tracey Ryniec Published on April 08, 2016
There are some companies you invest in because you know their product, how much money they make with it and believe in the growth projections.
When a restaurant chain tells you they are opening up 30 restaurants this year, you don't doubt them. But with biotechnology companies, those engaged in the research of cures or treatments for diseases, almost none of this is true, especially for those without a drug that has yet been approved for sale.
Yet investors love to gamble on the biotechs.
I know what you think. That it only takes one of them to hit a home run and you'll be rich.
But which ones? And what if you guess wrong? It's a risky game, but there are ways to lessen the risk.
3 Guidelines for Picking the Best Biotech Stocks
1. Trust the Covering Analysts
With the biotechnology companies, where so much relies on research, trials and published papers, it's best to rely on the analysts.
The analysts are the ones sitting in on the company conference calls, attending the medical conferences, and the closest to the management. They may even attend meetings with management which gives them additional insight.
Since most of us can't afford direct access to their research, another way to follow along with the analysts is to follow all of the financial news on a company because analyst upgrades or downgrades will be reported there.
Also, track the analyst estimates. You might not have access to the actual reports but on some financial sites like Zacks.com, you can actually see how many estimates have been cut or raised over a given time period.
This provides insight into what the analysts are thinking.
2. Earnings Should Be Rising
Many small biotechs don't have any earnings because their drugs are still in development
But as an investor, what you want to see are those analyst earnings estimates actually moving in the right direction. Even if they still remain in the negative for this year and next, look for estimates being raised, and not cut.
Buy biotechs with rising earnings estimates, not falling.
3. Worried? Buy in the Later Stages of Trials
Companies go through several phases in order to get the drug approved by the FDA.
Phase 1 is the smallest, and easiest phase. It usually involves just 20 to 100 patients. 70% of the drugs pass this phase.
Phase 2 can be several hundred patients. These trials can last months or years. Just 33% of the drugs pass this phase.
Phase 3 is tested on a larger test group of patients, usually numbering in the thousands. Just 25-30% pass this phase.
There's a Phase 4 where even more testing is done, usually involving an even larger number of test patients, to test the drug's safety and efficacy.
Once the company has sufficient data, then it can file a marketing application.
As you can see, many drugs don't pass various of the phases. If you want to improve your odds of owning a biotech company with a viable drug that it eventually can sell to patients, you should be buying in after the company has passed several of the phases.
There's still no guarantee, however, even if a company's drug makes it to Phase 3.
And the stock might not be as cheap at that point, as other investors might have bid it up in anticipation of a drug getting approved, but your risk is at least reduced.
by Tracey Ryniec Published on April 08, 2016
There are some companies you invest in because you know their product, how much money they make with it and believe in the growth projections.
When a restaurant chain tells you they are opening up 30 restaurants this year, you don't doubt them. But with biotechnology companies, those engaged in the research of cures or treatments for diseases, almost none of this is true, especially for those without a drug that has yet been approved for sale.
Yet investors love to gamble on the biotechs.
I know what you think. That it only takes one of them to hit a home run and you'll be rich.
But which ones? And what if you guess wrong? It's a risky game, but there are ways to lessen the risk.
3 Guidelines for Picking the Best Biotech Stocks
1. Trust the Covering Analysts
With the biotechnology companies, where so much relies on research, trials and published papers, it's best to rely on the analysts.
The analysts are the ones sitting in on the company conference calls, attending the medical conferences, and the closest to the management. They may even attend meetings with management which gives them additional insight.
Since most of us can't afford direct access to their research, another way to follow along with the analysts is to follow all of the financial news on a company because analyst upgrades or downgrades will be reported there.
Also, track the analyst estimates. You might not have access to the actual reports but on some financial sites like Zacks.com, you can actually see how many estimates have been cut or raised over a given time period.
This provides insight into what the analysts are thinking.
2. Earnings Should Be Rising
Many small biotechs don't have any earnings because their drugs are still in development
But as an investor, what you want to see are those analyst earnings estimates actually moving in the right direction. Even if they still remain in the negative for this year and next, look for estimates being raised, and not cut.
Buy biotechs with rising earnings estimates, not falling.
3. Worried? Buy in the Later Stages of Trials
Companies go through several phases in order to get the drug approved by the FDA.
Phase 1 is the smallest, and easiest phase. It usually involves just 20 to 100 patients. 70% of the drugs pass this phase.
Phase 2 can be several hundred patients. These trials can last months or years. Just 33% of the drugs pass this phase.
Phase 3 is tested on a larger test group of patients, usually numbering in the thousands. Just 25-30% pass this phase.
There's a Phase 4 where even more testing is done, usually involving an even larger number of test patients, to test the drug's safety and efficacy.
Once the company has sufficient data, then it can file a marketing application.
As you can see, many drugs don't pass various of the phases. If you want to improve your odds of owning a biotech company with a viable drug that it eventually can sell to patients, you should be buying in after the company has passed several of the phases.
There's still no guarantee, however, even if a company's drug makes it to Phase 3.
And the stock might not be as cheap at that point, as other investors might have bid it up in anticipation of a drug getting approved, but your risk is at least reduced.
