Investing in the Best Biotech Stocks

Feb. 25, 2021

Here is the article. 

I like to learn more how to invest biotech stocks. It is important for me to spend time to read about biotech basics. 

Biotech basics

What exactly is a biotech? It’s a company that uses living organisms (for example, bacteria or enzymes) to make drugs. This use of living organisms differentiates biotechs from pharmaceutical companies, which use chemicals to develop drugs.

There are four major steps for biotechs in developing new drugs:

1. Drug discovery, where biotechs identify drug candidates and the diseases that they could potentially target.
2. Preclinical testing, where biotechs test drug candidates in vitro (in test tubes) and/or in vivo (in living animals, such as mice).
3. Clinical testing, where biotechs test drug candidates in humans.
4. Regulatory approval, where biotechs seek to obtain approval from applicable government agencies to sell a drug.

Clinical testing typically involves three phases:

• Phase 1, which involves small studies designed to find a safe dose for the drug candidate and determine how it affects humans.
• Phase 2, which involves studies that can include around 100 or more patients and focus on safety, short-term side effects, and determining the optimal dose for the drug.
• Phase 3, which involves larger studies that can include hundreds or even thousands of patients and that focus on how effectively an experimental drug treats a target disease as well as how safe it is.

A drug candidate must successfully make it through each phase to advance to the next. Once a drug successfully completes a phase 3 trial by demonstrating safety and efficacy in treating the target condition, the biotech will file for regulatory approval using the clinical data from the study. In the U.S., the FDA oversees approvals for new drugs.

Investors should pay close attention to which phases a company’s drug candidates are in. The later the phase, the less risk there usually is. It’s also important to consider a drug candidate’s peak annual sales -- the highest level of sales per year that analysts project. The higher the better.

In addition, a biotech with more experimental drugs in its pipeline (the term used to refer to all a company’s drugs that are in development) will tend to have less risk than a biotech with only one or a very few drug candidates.

Another important thing to watch with biotechs is their financial positions. Most biotechs don’t achieve profitability until they successfully launch one or more drugs in the market. They require significant amounts of cash to fund operations and advance their pipeline candidates. Companies often issue new shares to raise the cash needed, which lowers the value of existing shares. Some biotechs also receive money through partnerships with larger drugmakers and grants from government agencies and nonprofit organizations.