We are just past the halfway point of the trading year. It has been a decent one for investors so far, especially in comparison to Europe and China, but not nearly as good as 2017 to this point. The small biotech sector has performed well despite what has been a somewhat lackluster M&A market. Small and mid-cap biotech stocks have risen in the mid-teens this year.
This has triggered what has been a notable increase in biotech IPOs coming to market here in the 'dog days' of summer. This can be a sign of a top although we are not yet seeing the deluge of new offerings that occurred in the summer of 2015, just before a bear market took the sector down some 40% from peak to trough.
It does seem an appropriate time to review two of the key 'rules of the road' when investing in this highly volatile space.
Every week I am asked what my favorite two or three small biotech stocks are right now. I do know that at least one or two of the dozens of small biotech equities I hold in my personal portfolio will go on to be 'ten-baggers' in the coming years. I also know at least a few will be implode and end up being close to worthless. If I knew which were which ahead of time, I probably would be retired by now.
Unfortunately, drug discovery and development is a very complicated business. Only one in roughly eight drug candidates that successfully complete Phase 1 trials will ever become an approved compound. Diversification is key in this space. Better 20 small positions spread across many promising equities in different disease areas than two or three big bets.
Know Thyself & Your Investments
Another question I get asked quite often goes along the lines of "I have $50,000 invested in XYZ, do you know what upcoming milestones and catalysts the company has?" First of all, I think investors should know those details before ever investing in a small biotech stock. Second, there is this thing called the internet where you can pull up one of several calendars that has these sorts of milestones listed for nearly every company. They are free and easy to access. Here is the one I use. Quarterly call transcripts are also easily and freely available to get a more granular view on a company's progression.
Doing some basic research prior to making a small investment within a well-diversified biotech portfolio can ensure you know what you are investing in and that your company has multiple 'shots on goal' in its pipeline.
This can be crucial to avoid knee-jerk trading reactions when your stock has a steep decline when not everything goes to plan. I have seen too many investors throw the baby out with the bathwater in these sorts of situations and live to regret that.
Let me give two quick examples of this. Earlier this year RedHill Biopharma (RDHL) went all the way down to $5 on a botched secondary offering and soon after Reata Pharmaceuticals (RETA) almost touched $20 after one of a half dozen trials it is conducting was unsuccessful. Both stocks have more than doubled since then. Well, at least for the patient and prudent investors that were following the rules of the road.
This commentary originally appeared July 20 on our sister site Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive daily columns from Ed Ponsi, Paul Price, Bret Jensen and others.