Just Another Wild Day on the Small-Cap Biotech Rollercoaster

I have been fascinated by and investing in small biotech companies for more than a quarter century now. This niche of the market is definitely not for the faint of heart. Frankly, there are days I wish I would have fallen in love with Blue Chips or Dividend Aristocrats early in my investment life. That course certainly would have been easier on my heart -- and probably for my hair line as well. Alas, the small biotech space will probably remain my temperamental and frequently cruel muse for the foreseeable future. Tuesday was a typical one for a biotech investor with positions in myriad small-cap biotech names. Before the opening bell, I saw great news on one of my holdings, Albireo Pharma . The company disclosed positive late-stage results for its compound targeting patients with a rare inherited disorder called progressive familial intrahepatic cholestasis. The shares were up 75% in pre-market trading. The stock opened much higher. Despite Albireo announcing a secondary offering later in the day, something that happens consistently on good news in this space, the stock managed a 45% gain for the day. Unfortunately, the Biotech Gods make Zeus and his cohorts look like rational and benevolent deities. I had not had a half cup of coffee digesting the positive results from Albireo before disaster struck in another one of my holdings, Corbus Pharmaceuticals . Its late-stage trial results released early Tuesday morning were nothing short of disastrous and the shares were down 75% in pre-market, balancing out the gains in Albireo at the time. Unfortunately, that is also where the stock finished for the day. Typical of the biotech space, everyone was blindsided by this data. That includes a fairly large analyst community -- such as Jefferies and Oppenheimer, who had reiterated buy ratings on the stock with price targets ranging from $18 to $32 a share in recent months. Insiders seemed in the same boat, as there has been no insider selling in this name stretching back to 2014 -- a span that included some 80 or so small and medium size insider purchases. Soon after the bell sounded, another holding of mine, Strongbridge Biopharma , announced positive Phase 3 results around its core asset Recorlev, for endogenous Cushing's Syndrome. Unfortunately, this good news was offset by comments from management stating that data from another trial on Recorlev would come in later than previously expected, thanks to slow enrollment in that study. The result will be that Strongbridge will have to delay its NDA for Recorlev by two quarters more than previous guidance. Unfortunately, enrollment in many trials across the industry has been delayed thanks to the pandemic. The stock was off some 20% in trading Tuesday as a result. While I was licking my wounds on Corbus and Strongbridge, good news arrived around Heron Therapeutics . Its NDA for HTX-011 is back on track after the company met with the FDA and resolved the picayune reasons that the application had received a complete response letter on its previous application. The stock was up nearly 10% on this resolution. In summary, it was just another day in Small Biotech Land. This is why I always to advise to be very well-diversified in this high-beta niche of the market. I have also have consistently advocated using covered call strategies using long-dated, just out of the money, call strikes. Doing this will provide significant downside protection while still allowing substantial upside potential. I believe these are the best ways to take some of risk out of an inherently high-beta space and allow you to better survive the daily roller coaster in this sector of the market.

Just Another Wild Day on the Small-Cap Biotech Rollercoaster

Use long-dated calls to take some of risk out of this inherently high-beta space.

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