How to Analyze Biotech Companies the Right Way

by | Jul 12, 2019

I trade one of the fastest and most lucrative sectors on the planet– biotech.

Source: Bloomberg

The type of moves that biotech stocks have is unprecedented. And I’m sure that I wouldn’t be approaching nearly $7M in career trading profits if it wasn’t for them.

And you know what?

I love teaching people how to trade them. Because it gives me a chance to reinforce and strengthen my knowledge in the sector.

In today’s lesson, I’m going to teach you how to analyze biotech stocks– it’s a building block that you’ll need if you want to start slaying biotech stocks alongside me.

 

How to Analyze Biotech Companies the Right Way

 

One of my favorite types of stocks to trade is biotech. Maybe it stems from the fact that I had aspirations of being a doctor and studied biology in college… either way, these stocks provide us with a lot of opportunities if you know what you’re looking for.

However, there is a bit you need to know about my catalyst runup strategy. Biotechs are often difficult to understand because they use a lot of lingo that traders don’t comprehend. They’ll use words like Phase I, II, and III, PDUFA, Orphan Drug Status, Breakthrough Designation, etc.

Now, it doesn’t take a whole lot to learn these terms and how to research biotech companies, which should uncover a lot of opportunities.

That said, I wanted to walk you through how I research biotech companies and consistently find winning trades.

The first thing I do when I’m finding trades is look to BioPharmCatalyst and try to see if there are any upcoming catalysts or just to see what treatments are in the pipeline.

For example, you can look at the calendar for ideas.

You can even do company-specific searches.

Once I find the company, I look into the pipeline to see what kind of treatments its offering. A lot of the times, you can go to the company website to find this information. For example, with Genocea Biosciences (GNCA), it has a promising pipeline.

Basically, the treatments in its pipeline are targeted towards cancer. Now, generally, treatments that aim to fulfill unmet needs for rare diseases… are the ones that have high growth potential.

Additionally, you want to see the company have multiple treatments in the pipeline. You see, biotechs go through a lot of stringent tests in order for the company to actually be able to market its treatments to the public.

That said, if you’re looking at a biotech stock… and it just has one treatment in the pipeline, it might not make for a great catalyst trade.

Thereafter, I’ll analyze the company, looking at things like:

  • Earnings.
  • Revenues.
  • Product releases or whether they’re working on a new breakthrough.
  • Company profile (who the managers are and do they have experience).
  • Insider actions.

Additionally, I’ll look at any data the company released.

For example, I actually traded GNCA (I didn’t buy and hold it… I actually bought one day and sold the very next).

Now, GNCA actually announced positive news for one of its cancer treatments a few weeks before I got into the stock.

Basically, the company released data from its Phase I / IIA study and noted:

  • In the five patients for whom immune response results are available to date, GEN-009 monotherapy elicited T cell responses to 91% of the vaccine neoantigens administered.
  • GEN-009 has proven to be unique among neoantigen vaccines in its ability to elicit ex vivo CD8+ T cell responses, which were observed for 47% of vaccine neoantigens. Inclusive of the results seen after in vitro stimulation, the CD8+T cell response frequency was 53%.
  • GEN-009 has been well tolerated to date, with no dose-limiting toxicities.

Once it released that data… the stock exploded and nearly doubled at one point. Well, if you missed that data… it’s okay because there’s another trade in the stock.


For example, when you look at the market cap of GNCA… it is under $100M. Typically, when biotech companies announce positive data that send the stock soaring… they’ll look to raise more capital.

Well, with such a small market cap and a massive move higher… it wouldn’t have been surprising if GNCA announced a secondary offering… which it did.

The company announced it would be conducting a secondary offering at $3.50, which was a discount to where the stock was trading, causing the stock to fall.

That said, when you’re analyzing these biotech companies, make sure you know their market cap because that will help you identify potential risks and target areas.

Now, there were actually insiders that bought nearly half the offering size in GNCA.

Glaxo Smith Kline (GSK) bought a stake, and GSK has a market cap of more than $100B… which showed a great vote of confidence in the company.

That said, I ended up buying shares after I saw that news, and alerted my clients about the trade.

Now, I wasn’t looking to buy and hold this… I was just looking for a short-term pop because there has been great news in GNCA.

Well, the very next day… my thesis played out and GNCA got a break higher.

As you can see, if you know how to analyze biotech companies… you could potentially find high-reward setups.

Now, if you’re looking to trade biotechs, or stocks and options in general, then you’ll want to check out my latest training session, as I go over how you can find clarity in this noise-filled market and uncover new trading opportunities.

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