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Biotech Stocks Trading: Researching Companies

Kyle DennisKyle Dennis ·

The most successful biotech stock traders conduct careful research. Analyzing biostatistics, catalyst events, and drug candidates helps biotech stock traders make informed decisions. You don’t have to learn everything about biotech stocks before you start trading them, but a little information like you’ll find in this guide goes a long way. Let’s learn more about the useful tools and information you should find before you start trading biotech stocks.

  • Use Stock Research Tools
  • Identify Catalysts
  • Researching Biotech Companies Example
  • Biotech Stock Trade Example
  • The Bottom Line

Use Stock Research Tools

Researching biotech companies may seem daunting at first, but there are some great online tools that can give you a helping hand. BamSEC, SEC Edgar, BioPharmCatalyst, and Finviz are some of the tools used by new and experienced traders alike. New traders with little capital will happily note that most are free to use. BamSEC does have a monthly fee, but if you can afford it, you’ll appreciate the way this tool condenses all SEC filings for you. Play around with these stock research tools and you’ll soon discover how easily they can put a wealth of information at your fingertips.

Identify Catalysts

Identifying catalyst events is essential for successful biotech stocks trading. Catalysts are industry-changing or company-specific news which cause the values of biotech stocks to rise or fall. A Phase I, II, or III data release for a drug candidate or U.S. Food and Drug Administration approval are common catalysts that can easily double or halve a stock’s value.

Researching Biotech Companies Example

Now, you’re probably wondering how to research stocks. Following this step-by-step process can help you find all the information you need to find the best biotech companies and make knowledgeable biotech stock trading decisions.

BioPharmCatalyst.com is a great tool for preliminary research. This online tool is free to use and helpful for identifying upcoming catalysts. It is one of my favorite tools for idea generation.

If you go to the sidebar and click on “Catalyst Calendars,” then “FDA Calendar”, you should see something like this.
When I find a biotech stock that interests me, I’ll visit the company website and look at the stock chart. If all looks good, I’ll conduct some more due diligence. The company website can tell you whether it has more than one drug in its pipeline.

Investing in biotechnology companies developing several drugs is always a smart strategy as their stocks are likely to be more stable. When companies have a single drug, their stocks’ value relies solely on the FDA’s approval of just one drug. While you’re there, research the company’s history and its managers.

Thereafter, you can go to SEC Edgar to look at company filings. BamSEC is a similar tool that’s a bit more user-friendly, but it does charge a monthly subscription fee. It’s a personal choice whether you think it’s worth sacrificing some of your capital for its accessible information.

I like to research whether insiders are buying or selling the stock. Insider buying and selling can be found on the SEC Form 4.

For example, here’s an example of insider buying, which looked interesting to me.

The Chief Revenue Officer, along with other directors, bought shares after Tilray Inc. (TLRY) conducted its initial public offering (IPO). That’s pretty bullish to me.

Another fact that interested me was found in the SEC Form 424B4. Privateer Holdings owned over 80% of the equity interest in the company, and over 90% of the voting power. That means Privateer Holdings has control of the number of floating shares.

With that in mind, the company could potentially explode if there’s a positive catalyst. Here’s a look what the stock did after a slew of positive catalysts. It’s not unusual to see biotech stocks with large percentage moves like this.

Biotech Stock Trade Example

Let’s see how I put some information I researched into action with a biotech stock trade example. This example will give you some idea of how you could apply the information you uncover to find the best biotech companies to invest in.

Amarin Corporation PLC (AMRN) had an upcoming data release and I was interested. The drug in the pipeline was fish oil and looked like it was going to be the “gold standard.” Now, I looked to buy in front of the catalyst for the run up.

Prior to its positive data, the company had a fantastic earnings call and updated the data for their trial. I bought stock and call options (which were expiring in a few months). I expected the stock to rebound and run up into the catalyst event.
Now, I don’t like to hold a stock or options into a data release because that goes against my strategy. The catalyst run-up didn’t work as well as I expected.

I sold my AMRN call contracts for about a breakeven trade. I held these for a long time and it was finally getting a run. However, again, I didn’t want to hold into a catalyst event because this is such a risky strategy. While some shares increase their value dramatically, they can also drop just as substantially. However, some risk-taking traders profited from the catalysts.

If you’re interested in taking advantage of the volatility of biotech stocks, the catalyst system can show you how to time your entry and exit points for maximum profit potential.

The Bottom Line

If you want to trade biotech stocks, learning how to research stocks should be your first step. You don’t need to know the company like the back of your hand, but you should know it well enough to understand what’s going on. For example, I focus on the drugs in the pipeline, the managers, company history, earnings, and insider buying. This should be enough to get you started developing a biotech stocks watch list and trading plan. For more insight in trading stocks, including biotech stocks, tune in to our podcasts.

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