Develop Biotech 'Buy-Sell' Strategy

I spend a good portion of my day researching, writing about and investing in the small biotech and biopharma space. I find this area absolutely fascinating. These sectors are also extremely volatile but when things go right an investor can be the recipient of huge gains. The small cap biopharma and biotech sectors have been kind to my portfolio over the past six months. Over the last half year I have been fortunate enough to see myriad names in my portfolio double and triple. I have also profiled these name like Avanir Pharmaceuticals (AVNR), Eagle Pharmaceuticals (EGRX), Tetraphase Pharmaceuticals (TTPH), ZIOPHARMA Oncology (ZIOP), Curis Inc. (CRIS), and Achillion Pharmaceutical (ACHN) among others here on Real Money Pro as well as on SeekingAlpha and Investors Alley. Given the time I spend on the subject, I get a lot of questions concerning investing in these turbulent areas. The most popular and consistent question I get around these types of investments is what do I look for before investing in one of the hundreds of small, relatively-uncovered names in these sectors. I have touched on this question many times over the years in these columns. There are myriad factors that go into making a small-cap concern in these spaces attractive for acquiring a small stake in the equity. Among these are interesting technology, upcoming milestones, at least a couple of shots on goal, strategic partnerships or licensing deals with larger players in the space, solid balance sheets, increasingly positive analyst commentary and insider buying is always nice to see as well. The second question that occurs a lot especially after one of these stocks has a huge rally is when one should take profits. I don't generally price targets on small biotech and biopharma selections because s when things fall into place they can be rocket ships that an investor wants to ride. I also have discovered over the years that there are three horrid feelings investors can experience in these spaces. The first is when you stock implodes due to a bad trial result. Unfortunately there is not much you can do about that other than diversify your portfolio into a good number of small but promising plays in these arenas. The second bad feeling is when you buy a stock and it doubles or triples in short order; you fail to take any profits, and six months later it is trading back at where you bought it. The third feeling is the worst and one I have experienced many times with companies like Lannett Group (LCI). This is when the stock you buy doubles or triples in short order and you cash in your entire stake, only to watch the shares double, triple, quadruple or from where you sold! With Lannett, I bought a stake in the company that was facing some regulatory scrutiny back in late 2012 for approximately $4.50 a share. In less than nine months, the shares traded north of $11.00 a share and I cashed out my entire position. The shares now trade for over $64.00 a share. It is the only 150% gain in a short time period that I want to slit my wrists every time I think about it. I have developed the following philosophy over the years based on experience, often painful. It is my rule of thumb when it comes to small biotech and biopharma stocks. That is to sell 10% of your original stake once one achieves a 50% gain, 20% of the original stake after the stock doubles and 20% more if one is fortunate to have your stock triple. Your profit is now locked in and the other half of the original stake now rides on the house's money unless something drastically changes on the company's prospects. I have found it to be a prudent and profitable strategy over the years. Get an email alert each time I write an article for Real Money Pro. Click the +Follow next to my byline on this article.

Develop Biotech 'Buy-Sell' Strategy

When to take profits is a tricky but important decision.

Columnist Conversation

Two Good Signs -- Especially for Small-Cap Investors

More Insider Buying in American Woodmark (AMWD)

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.