Introduction

In this article, we would like to introduce you to a very special type of share. These are biotech companies. These are companies that develop and market drugs, many of them only for extremely rare diseases. Many of them have a very low market capitalization (market value) of less than USD 100 million, some even less than USD 10 million. This article is about precisely these companies, all of which have a market capitalization of over USD 1 billion. USD are not considered here, as many of the tips are no longer applicable to them.

The special thing about biotechnology companies is the highly speculative aspect. For you, this means that enormous profits (but also losses) are possible. Price rises of several 100% in one day occur frequently, but a dramatic fall in the price can never be ruled out. We’ll show you why and what you need to watch out for to avoid the worst traps.

But be warned: only trade in biotechnology companies if you are not afraid of risk and can handle losses.

Tip 1: Know the pipeline

Find out which drugs the company is producing or currently developing. Every biotech company website has a pipeline page. The pipeline usually shows you the company’s portfolio, news on developments and the current status. A distinction is made between phases (pre-clinical, phase 1-3, etc.). Phases 1-3 can also be subdivided into phases 1a and 1b, etc. In each phase, the number of test subjects (i.e. humans) is increased.

Note: Most drug trials fail in phase 2!

Check which diseases the company wants to treat. Google will certainly help you to find out the German names.

Tip 2: Focus on blockbusters

Honestly, while it is commendable to develop drugs for very rare diseases (ultra rare diseases), it is usually not financially worthwhile, and this is reflected in the so-called market potential. And this naturally has a negative impact on the value of the company and therefore the share price.

So: focus on companies that are developing blockbusters for common diseases. If a company develops a promising drug for Alzheimer’s or HIV, for example, then that IS a potential blockbuster.

Tip 3: Don’t be dazzled

Biotech companies often have incredibly well-designed websites that come across as highly professional. The annual reports look slick and colorful, and their own successes are praised to the skies.

But take a closer look: If a company only has two potential candidates in the pipeline and these are still a long way from approval (e.g. if phase 2 has only just begun), the risk of failure is high. If one candidate turns out to be ineffective, only one candidate remains and the company is on very thin ice. The share price will plummet.

Always remember: individual phases can sometimes last several years (depending on the disease/medication).

Tip 4: Low cash or high cash burn = red alert!

Many of these companies have a notorious lack of cash and are therefore periodically dependent on cash injections. These can be financed by banks, bonds, private investors or, as is usually the case, by issuing additional shares (so-called public offerings). And therein lies the crux of the matter.

If a company with a share value of US$ 50 million issues new shares worth US$ 10 million, the existing shares are worth less, in this case 20%. The share price will fall accordingly after such an announcement.

Always look at the balance sheets: How much cash does the company have left, and how much does it spend per quarter/year. Then you can easily estimate how long the available capital will be sufficient to pay for the expensive studies and research.

Do avoid companies whose capital is not sufficient for the next 12 months!

Tip 5: Get aware of the indication / area of medication

The chances of development and success are not equally good for every area. Oncology (cancer research) has the lowest rate, but drugs in the field of neurology/psychiatry/heart disease also have statistically the lowest chance of successfully completing the entire research cycle.

The chances are far better in the fields of allergy, urology, infectious diseases and hematology (blood diseases).

Tip 6: Risk management!

Consistent risk management is even more important here than with “ordinary” shares. Pay constant attention to company news and keep yourself even more informed than usual so that you can react quickly in an emergency.

Set somewhat more aggressive stop-loss limits. If you normally set a limit of 10%, set 15 or 20% here. This is your maximum loss. Painful, but it could be much worse in the event of catastrophic news about a drug, etc.

Biotech companies fluctuate much more strongly in price and are therefore more volatile, so you have to set the stop loss a little further away to avoid being “thrown out” of the share if the share price swings a little more strongly for no particular reason. This can happen from time to time, but the price usually recovers quickly.

Tip 7: Low volume = increased caution!

Smaller companies are naturally also traded with less volume/turnover. If the average volume traded per day is less than US$ 1 million, you must exercise particular caution.

Such values are very speculative and are also misused as such by traders. Be careful not to fall into such a trap, because if a large block of shares is sold, the price can plummet within a short time. But what’s even worse is that you can then hardly get out because the selling pressure outweighs the buying interest. In other words: you can’t get rid of the hot potatoes and burn yourself out! You sit on your shares and have to watch desperately as the price plummets. See tip 6!

It is also often the case that shares skyrocket after certain good news, with x times the normal daily volume. This effect can continue for a few days, but then interest wanes, profit-taking takes place and the price falls and falls, as does the volume, which settles back at a “normal” level.
If you bought the share at a very high price (on the good news), you will hardly be able to get rid of it now. So don’t be blinded by short volume spikes. Just a few days later, interest in the company may be practically zero again. The world moves fast, especially in this sector!

Tip 8: The bitter candy

Unfortunately, a bad habit has developed in recent years, but it is becoming increasingly common. A biotech company announces great test results from a test series and the market reacts immediately, the share price soars. If you hold this share, you will shout for joy. But that cheer could quickly get stuck in your throat.

Why is that, you may ask? Well, this bad “fashion” consists of announcing good news (of which the management naturally knows that the share price will skyrocket) at the same time or shortly afterwards also announcing bad news, usually a hefty capital increase through shares, which leads to a dilution of the existing shares (loss of value). This means that the share price gain is gone again, or at least the share price falls again to such an extent that you must have lost your joy.

So: if the price is rising rapidly and you would rather play it safe, sell and take the profit. Waiting too long could be quite a drag. But if you have the stamina, then hold the shares and hope for further price gains. Anything is possible, but you’ve been warned!

Miscellaneous tips

• Search for catalysts. These are upcoming events, such as the publication of test data, laboratory results, etc. These are usually announced in advance. Such events offer enormous potential (in both directions, so only for very risk-averse investors)
• Does the company regularly participate in forums/seminars etc. where results are presented? If so, this is a good sign.
• The company website often states whether the company cooperates with one or more major manufacturers (such as Abbott, Merck, Pfizer, Roche, etc.). If so, this is also a good sign.
• Is the company developing drugs that could be effective for several diseases? If a biotech is researching a bladder cancer drug, this could also be useful for other types of cancer. Such synergies have blockbuster potential.