5 Secrets of Biotech Investing

Marc Lichtenfeld|October 19, 2021

Editor’s Note: Our good friend and biotech expert Marc Lichtenfeld is hosting a one-of-a-kind event on Wednesday, October 27. He’s calling it the Oxford Investing Games, and it’s a FREE virtual event that will showcase the huge opportunities in the biotech sector. There will even be chances to win free stock picks! To sign up for the free event, just click here.

And keep reading to find out what Marc looks for in a good biotech stock.

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I got involved in the biotech sector in 2004 because I realized that no other sector had the same potential for enormous gains and sustained growth.

You’ve likely heard the stats. Ten thousand baby boomers turn 65 every day in the United States.

And what do we consume more of as we get older?

Healthcare.

As we advance through our senior years, more of us get sick and require more medicines for difficult-to-treat diseases.

So if I could invest in only one sector for the next five or 10 years, it would be biotech.

But in such a hot – and fast-moving – sector, it’s critical to know what to look for in order to find the companies with the best chances for success.

So here’s what I look for when choosing biotech stocks.

Game-changing technology. I’m not interested in a company that has a cancer drug that adds two months of life over the existing standard of care. I want to see entirely new approaches to treating disease – something we’ve never seen before.

Safety. A drug is unlikely to get approved if it is unsafe, no matter how effective it is. I pay particularly close attention to Phase 2 trial results because that’s usually the first real indication of whether a drug is safe enough to try in a larger population.

Upcoming catalysts. Biotech stocks can move quickly on news. I don’t want to be sitting with a stock for a year and a half waiting for clinical trial results. I typically want to see important trial data within six months.

Cash on the books. Most small cap biotech companies are unprofitable and burn through cash. I’d rather not be holding the stock when management sells shares to raise capital. This dilutes existing shareholders and causes the stock to drop. If the company has a lot of cash already, that reduces the chance that it will hold a stock offering.

Smart money. I like to see investors who I respect buy large holdings in the stock. When I see investors like Felix and Julian Baker or others holding shares, I know some major league brainpower has reviewed the company’s science and the investment opportunity and decided to move forward. My confidence is also boosted when insiders own a lot of shares.

From there, I’ll dig into the clinical trials, investigate management to see whether there are any red flags and conduct other due diligence.

There are a lot of factors that go into deciding whether to pull the trigger on a biotech stock, but the list above is a good start.

And remember that no other sector sees stocks move 50% or sometimes even more than 100% in a day on a takeover announcement.

Five Prime Therapeutics (Nasdaq: FPRX) was up 78% in one day in March on an acquisition announcement – and that was after it had jumped 349% in one day in November after reporting positive data.

I believe biotech is the most important sector in the market and will be for the next five to 10 years and beyond. Your portfolio should have some exposure to it in order to take advantage of the enormous potential.