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Why the catalyst matters with biotech stocks

Kyle DennisKyle Dennis ·

Biotech investors get used to seeing charts on stocks that have jumped or fallen significantly at some point. Inevitably, those pops and free-falls are caused by a catalyst, whether it’s data from clinical trials or U.S. Food and Drug Administration (FDA) approval.

Let’s discuss why the catalyst matters, particularly in biotech stocks.

Catalyst defined

A catalyst is an event that could move the price of a stock or security up or down. Typically, to name just a few, this means company news, earnings releases, FDA approvals, analyst comments or industry developments.

With biotech stocks, following events, or catalysts, can be helpful in uncovering trading opportunities. For example, when an important event is coming up, you might want to trade the stock in anticipation. With a positive catalyst, the stock should rise, while bad news could send the stock price falling fast.

Examples of catalyst trades

One way to search for events that could affect biotech or pharmaceutical stocks is by visiting biopharmcatalyst.com. If you go on their FDA catalyst calendar, you’ll see something like this:

Source: Biopharm Catalyst

Here’s an example of a biotech stock affected by a catalyst.

On June 12, 2017, shares in Coherus BioSciences Inc. (CHRS) ended the day down over 20%. The plummet was due to the U.S. FDA’s decision to reject the company’s Biologics License Application for its drug candidate CHS-1701, a similar treatment to a white-cell booster Neulasta, which was developed and marketed by Amgen Inc.(AMGN).

In the complete response letter (CRL) from the Food and Drug Administration, the FDA requested a reanalysis of a subset of subject samples with a revised immunogenicity assay, as well as other requests for certain additional manufacturing related process information. In plain English, it added a roadblock to Coherus BioSciences’ drug pipeline, adding a measure of uncertainty to the company’s future revenues and earnings growth.

Check out the chart on CHRS after the press release.

Source: TradingView

The stock gapped down, but rebounded slightly by the end of the trading day. Therefore, you would want to focus on catalysts and discern whether it’s positive or negative.

Now let’s examine a positive catalyst.

Jazz Pharmaceuticals ( JAZZ) provided an update on the data from its Phase III study of one of its lead pipeline candidates, JZP-110, in adult patients with excessive sleepiness, associated with obstructive sleep apnea and narcolepsy. The data indicated the treatment had positive efficacy results from its global multicenter study. Consequently, the stock ended the day up over 4% on June 7, 2017, the day after the data presentation.

Here’s a look at the 15-minute chart below.

Source: TradingView

Final Thoughts

Catalysts affect biotechnology stocks significantly. The cases here are two examples, but there are more cases nearly every day, creating a plethora of opportunities in biotech and pharma stocks. If you’re looking to trade in the sector, keep an eye open to catalysts to avoid surprises and to get news working in your favor.

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 Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.

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