As the COVID-19 pandemic rages on, once-speculative biotech companies have become household names.
While only 55% of American adults invest in the stock market, even fewer concentrate on the healthcare space. But they’re missing out on a huge opportunity…
Just take a look at the performance of the iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) and the VanEck Vectors Biotech ETF (Nasdaq: BBH) compared with the performance of the broader market since 2012…
These exchange-traded funds, which used to track the S&P 500, have set themselves apart in recent years.
But while biotech is one of the most lucrative sectors in the market, it is also one of the most volatile.
As Chief Income Strategist Marc Lichtenfeld explained in one of his State of the Market videos, there are five key elements to look for to safely – and successfully – invest in a biotech company.
A longtime veteran of the industry, Marc sets his sights on companies that…
- Engineer game-changing technology
- Develop drugs and treatments that are safe
- Have upcoming catalysts on the horizon
- Hold a solid amount of cash
- Attract institutional investors.
As the market for biotech stocks becomes more crowded than ever, it is even more imperative to hold potential investments up to Marc’s five standards…
1. Game-Changing Technology
To be successful, a biotech company must do more than just improve the standard of care. Seek out companies that continually innovate new industry-changing technologies.
For instance, consider the iShares Genomics Immunology and Healthcare ETF (NYSE: IDNA), a fund focusing on companies that use genomics and bioengineering to fight disease.
Over the past year, this fund has outshone its peers from the biotech sector by nearly 30%.
2. Safe Drugs and Treatments
It’s also critical when investing in a biotech company to ensure that the treatments it develops are safe. If a drug posts poor results in clinical trials, it will not be approved.
But luckily, you don’t have to be a biotechnology expert to ensure you’re investing in companies that are committed to patient safety.
One way to get an early idea of a treatment’s viability is to watch its Phase 2 trial results. This is the stage of development in which a drug is tested on a larger number of patients in varying dosages.
According to Marc…
Very often, when a company reports strong Phase 2 results, the stock takes off, as it is the first real indication that it might be approvable.
Investors get excited, potential partners begin sniffing around and the media begins to cover the drug’s potential.
Focusing on biotech companies that are in Phase 2 of clinical trials can be a good way to ensure that you don’t see a drug through to the end of its development only for it to be rejected.
3. Upcoming Catalysts
Phase 2 clinical trial results are only one of a variety of catalysts that can send a biotech stock higher or lower.
If you are confident in a company’s treatment and are excited to play the stock at the latter end of the drug’s development, one catalyst to keep an eye on is Prescription Drug User Fee Act (PDUFA) dates.
After the Food and Drug Administration receives an application for a new drug, it is given a specific window to approve or reject the application. The deadline for this window is known as the drug’s PDUFA date.
4. A Strong Cash Supply
Sometimes, a biotech company can be a risky investment not because of the viability of its drugs under development, but because of its finances.
Like any other business, a biotech company needs to have strong management and cash on the books in order to succeed.
According to MarketWatch, some of the most dangerous biotech companies to invest in are those with market caps of $5 billion or less that need to raise money within the next 12 months.
Not all small biotech companies are at risk of funding problems, but those that are will be under pressure to issue more shares and dilute their prices.
5. Institutional Investor Interest
No matter which sector of the market catches your eye, it can be a good idea to track the movements of the “smart money,” or institutional investors and other professionals.
These investors are required to report their holdings to the Securities and Exchange Commission using Form 13F. Often, these are filed in the middle of February, May, August and November.
As Marc put it in his video scoring upward of 10,000 views…
When I see investors like Felix and Julian Baker or others, I know some major-league brainpower reviewed the company science and investment opportunity ahead of me and has decided to move forward.
My confidence is also boosted when insiders own a lot of shares.
In an industry as complex as biotech, there’s nothing wrong with “following the leader” and tracking where institutional investors and corporate insiders are placing their trust.
Finding Your Next Investment
This is a corner of the market where some of the smallest companies can make the biggest leaps forward.
If anything, the COVID-19 pandemic has proven the biotech sector’s resilience and its capacity to innovate under extraordinary pressure.
Be sure to take into account Marc’s five ideals of a successful biotech the next time you consider dipping a toe into this exciting and volatile sector.