When you think of the word innovation, the first thing that comes to mind is likely technology. After all, technological innovation has changed the lives of the average consumer for the better. Today, we have the world at our fingertips, cell phones that are more like computers, and blinds that can open themselves as a result of a vocal request.
However, technological innovation hasn’t just changed the way we watch our favorite shows and shop for our favorite products. Technological innovation has led to a healthcare renaissance of sorts.
30 years ago, AIDS was a death sentence, there was no cure for Hepatitis C, most cancers were killers, even the seasonal flu was something to be very afraid of. Today, none of that is the case.
AIDS can be treated, there is a cure for Hepatitis C, and many cancers can be cut out or cured in another way. We’ve gone a long way, and much of this has been driven by an industry known as biotechnology.
Of course, this renaissance in the healthcare sector has made many millionaires. Those who invested in blockbuster treatments and medical devices before they were approved by regulatory authorities are smiling from ear to ear.
Importantly, medical innovation has not come to an end, and new opportunities to get in on treatments before they become publicly available take place every day. So, how do you tap into these opportunities?
What Are Clinical Stage Biotechnology Stocks
Clinical stage biotechnology stocks are stocks that represent companies in the healthcare sector. These companies don’t currently have any therapies on the market. Instead, they are dedicated to the development of new therapies.
However, these companies aren’t in the beginning stages of development. Not only do they have an idea for a new treatment, they have a candidate, or a tangible treatment or device that is able to be studied.
Going one step further, these candidates have already been reviewed by regulatory authorities who have approved for these treatment candidates to be used in a human setting. This is done through what’s known as a clinical trial.
Clinical stage biotechnology companies are essentially companies that have not yet brought a therapy or device to market, but have one that is currently being studied on humans in a clinical setting.
The stocks that represent these companies often come with low prices and are viewed as highly speculative. They tend to offer a binary opportunity. Either their treatment or device will be proven in the clinic to work, or it will not. If it does work, it will be approved and marketed, sending the stock skyrocketing. If the treatment or device doesn’t work, it will be scrapped, millions of dollars in research will be for not, and the stock will fall dramatically.
So, if you want to invest in clinical stage biotechnology stocks, it’s important that you make educated decisions when making your picks.
How To Choose Clinical Stage Biotechnology Stocks
All investors, whether beginners or experts, know that not all stocks are created equally. A quality stock will rise in value over time while those that represent companies in trouble will generally see tremendous declines.
Choosing clinical stage biotechnology stocks is all about research and understanding what you’re getting into when you buy shares. Follow these steps to increase your odds of making strong picks in the sector:
Step #1: Look For Companies In Late Stages Of Development
There are multiple stages involved in clinical development. These include:
- Phase 1 Clinical Trials – Phase 1 clinical trials generally take place among a small group of healthy volunteers. The goal of this phase of clinical testing is to prove that a new treatment or device can be used in human beings safely. Phase 1 clinical trials are where companies learn things like maximum tolerated dose, extent of adverse events, and how well patients could potentially tolerate treatment.
- Phase 2 Clinical Trials – In Phase 2 clinical trials, a small group of patients is generally provided with the treatment. These patients have confirmed cases of the ailment that the treatment is designed to address. In many cases, these patients have been heavily pretreated with standard of care therapies to no avail. The Phase 2 clinical trial is designed as a proof of concept of sorts. Comparing the new therapy to a standard of care, clinical stage biotechnology companies learn how effective their treatment is in a small patient population.
- Phase 3 Clinical Trials – Finally, Phase 3 clinical trials are often pivotal. That means that if things go well, the company will seek regulatory approval to start marketing the treatment. These trials enroll a large patient population, generally with varying levels of pretreatment. In these trials, efficacy, safety, and tolerability among the masses is addressed.
When making a long-term investment in a clinical stage biotechnology stock, you want to look for companies that have already proven to some extent that their treatment is safe and effective. As such, it’s best to look into companies that have already made it through Phase 1 and Phase 2 stages of development when making your list of clinical stage biotechnology stocks to follow.
Step #2: Dig Into The Clinical Data
One of the benefits to looking for companies that are in Phase 3 of clinical development is that there is plenty of data to comb through. Search through the company’s website, on search engines, SEC filings, and more to find all the information you can about the previous Phase 1 and Phase 2 clinical trials.
Read through the results of each of these trials. While you may not be a doctor, press releases surrounding clinical results make it relatively easy for the average person to understand.
For example, a company may be creating a therapy to address non-small cell lung cancer (NSCLC). While you may not understand all the details as to how the drug works, in the press release, you learned that 9 out of 10 patients in a Phase 2 clinical trial saw their cancer become stable or shrink.
The data also showed that there were minimal side effects, including diarrhea and vomiting in 33.3% of the patient population.
In this case, the company is likely onto something, and it doesn’t take a brain surgeon to figure it out. All it takes is a willingness to research before diving into an investment.
Step #3: Research The Financial Data
Publicly traded companies are required by the Securities and Exchange Commission to release their financial results quarterly. It’s important to dive through this because it doesn’t matter if the company is developing what could be the most profitable treatment in the world, if they can’t afford to make it through development, there could be declines ahead.
Look at the last financial release from the company. In particular, dig into how much money the company has in the bank and how much money they’re spending on a quarterly basis. Do they have enough money to make it through the next four quarters? If so, they’re in a strong financial position. If not, they may need to raise money in the near term. This often happens at the cost of investors through dilutive transactions which send the stock tumbling.
Step #4: Gauge The Market Potential
If you feel as though you’ve found a company with a strong potential treatment in late stages of development that’s standing on a solid financial foundation, it’s time to dive into the market potential of the therapy currently under development.
Start by finding out projections for the overall value of the industry. For example, if you are looking into a company that is developing a lung cancer treatment, go to Google and type “Lung Cancer Market Size” into the search bar.
You’ll find multiple research firms that provide predictions on how fast the lung cancer therapeutic market will grow and how much money annually will be spent within that market. The potential of a drug to become a blockbuster is greater when the market being addressed is a multi-billion dollar market annually.
It’s also important to consider the competition that the company will face if their drug is approved. After all, even if you’re addressing a multi-billion dollar market, if you’re one of hundreds of options, it may be very difficult to tap into even a small percentage of the market.
To look into competition, find your way back to Google and do a little more digging. Using the lung cancer example from above, you would type in “Lung Cancer Treatment Options.” This would outline the various options available for those fighting lung cancer. A search for “Top Lung Cancer Drugs” will yield information on some of the top competitors the company will face if their therapy is approved.
Do as much research as you can. Once you’ve done so, think about how much money a new drug could make in the market being addressed if successful. Ultimately, the goal is to invest in a therapy that has the potential to produce hundreds of millions, or even billions in revenue annually.
Step #5: Look At Partnerships
Oftentimes, if the therapy being developed by a clinical stage biotechnology company shows promise in a profitable area of healthcare, the company will have big name partners.
These partners generally assist in or completely cover the cost of clinical development, manufacturing and regulatory approval. In exchange they either receive rights to sell the treatment, providing the company that developed it with milestone payments and royalties, or they will receive royalties in exchange for their involvement.
Before making an investment, take a look into the partnerships surrounding the therapeutic candidate that you’re considering investing in. Make sure that these partnerships offer decent terms that will result in strong revenue for the clinical stage company should the drug be successful.
Step #6: Make An Educated Decision
Once you’ve done steps one through five, you’ll have quite a bit of information about the company that you’re considering investing in. This will allow you to make an educated decision as to whether or not the clinical stage biotechnology stock you’re interested in will be a blockbuster or bust.
Now, it’s time to act. If you feel that the company is onto something, it’s time to dive in and make your investment.
Risks To Considering With Clinical Stage Biotechnology Stocks
Some clinical stage biotechnology stocks have the potential to grow into some of the world’s largest medical companies. Of course, this is an exciting prospect for any investor. However, investing in these stocks also comes with its share of risk.
- Clinical Failure – One of the biggest risks in the world of clinical stage biotechnology stocks is clinical failure. If a new drug fails to prove effectiveness, safety, or tolerability in a late stage clinical trial, it will be back to the drawing board. This means that investors excited about a regulatory submission won’t get to see one any time soon. Instead, either the asset will be scrapped or millions more will have to be spent on development. Either way, a clinical failure ultimately leads to tremendous declines.
- Financial Blues – Clinical stage biotechnology companies aren’t the most financially sound. The fact of the matter is that with no approved drugs on the market, they don’t have any revenue coming in. This means that they rely on money in the bank, grants, and the investing community for funding. Sometimes, this can lead to dilutive transactions that ultimately cost the investor money.
- Manufacturing – You can have the best drug in the world, but if you can’t mass produce it, you’re not going to do too well. Drug developers are often at the mercy of drug manufacturers. Should something go wrong in manufacturing, it could prove to be a major setback for the company and its stock.
- Market Failure – Finally, everything may seem to be coming together, but when a drug hits the market, it doesn’t do very well. A great example of that is MannKind’s Afrezza. The inhaled insulin helped a subset of diabetic patients avoid giving themselves insulin shots. Many expected the drug to fly off the shelves and the stock to take off. Unfortunately, sales started off slow and today, the company trades at a more than 90% discount to what it traded before the approval of Afrezza. Market failures can be very expensive.
The Bottom Line
The bottom line is that medical innovation isn’t likely to end anytime soon. As long as people get sick, new opportunities to create blockbuster medications and devices will emerge.
While chasing these opportunities may be risky, when you invest in the right clinical stage biotechnology stock at the right time, you could see tremendous long run gains.