Biotech is an exciting and emerging space that’s attracted increasing investor interest in recent years.
But as exciting as the new treatments and technology coming out of the sector can be, there’s even more experimental biotech that never sees the light of day. Between 2000 and 2010, the Food and Drug Administration (FDA) approved an average of just 23 new drugs per year. While that number is trending steadily upward, reaching 50 approvals in 2021, the reality is that the overwhelming majority of drugs in development never make it to the market.
In the current bearish market, that can be daunting for traders looking for opportunities to generate returns on biotech stocks. Here are some of the key things to keep in mind as you put together your biotech trading strategy.
Biotech Stocks Are Prone To Rising And Falling Rapidly And Often
The biotech sector is extremely responsive to the news cycle, making it an exciting space for active trading. One notable example of that is Novavax Inc. NVAX, a biotech company that makes vaccines. When news came out that the then-clinical-stage company would receive $1.6 billion in funding from the U.S. government at the start of the COVID pandemic, the stock surged from around $7 in February 2020 to $170 by August of the same year and ultimately peaked at about $290 in February 2021. A trader who caught that massive swing would have likely pocketed record-setting returns.
But with any rapid-growth sector comes significant risks, and that’s also true with clinical-stage biotechs. With no marketed products, these companies aren’t yet generating revenue so their fates are entirely determined by the FDA approval process. Good news from clinical trials can generate strong growth in a stock’s price while bad news can cause it to plummet overnight.
Biotech Jargon Makes Accurate Buy-And-Sell Signaling A Challenge
Unless you have a medical or science background, deciphering biotech jargon can be a challenge. Every company believes it has the most exciting, breakthrough drug in development and is optimistic that FDA approval is a sure bet. This can make it hard to tell which biotechs really have a truly groundbreaking therapy in the works. It’s also easy for investors who don’t know enough about the clinical research process to place more weight on clinical results than they really merit.
This also makes it harder to rely on buy-and-sell ratings from analysts. Even if the analyst in question is familiar with the space, biotechnology is complex, and the road to FDA approval is long and winding. What looked like a promising new drug last week can be revealed to be completely ineffective the next.
Fortunately, an important element in short-term trading is whether the company can generate enough excitement about its drug to move the share price up enough for you to generate a return. So short-term trading can still be profitable even when the news is more buzz than substance.
Follow The Clinical Research Process To Find Short-Term Trades
For individual stocks, traders may want to closely follow the drug development process. As biotechs announce preclinical and clinical trial results, the stock potentially will tick up or down in accordance with whether the latest data was positive or negative. These spikes and dips are usually short-lived, especially in the preclinical and Phase 1 clinical stages where positive or negative results are important, but so much can change as development continues that the ultimate fate of a particular therapy is still uncertain.
By Phases 2 and 3 clinical trials, the therapy in development starts to be taken more seriously, and spikes or dips caused by each release of new data tend to last a little longer — and cause bigger price movements. That means traders may want to hold their position a bit longer, hoping for larger returns, but will still want to be ready for an early exit if necessary.
For perspective, it takes over 10 years on average for a drug to move through the entire regulatory approval process, and just 7.9% of drugs in Phase 1 clinical trials ultimately get FDA approval. Of those that reach Phase 2, 28.9% will make it to approval. By Phase 3, the likelihood of approval is 59%. The odds increase with each phase, but there is still a significant chance a drug never makes it to market up until the moment the FDA makes its final approval decision.*
Learn More about Direxion’s Daily S&P Biotech Bull & Bear 3X Shares
With a sector that fluctuates as much as biotech does, and with so many small-cap companies that can soar or crash at any moment, picking individual stocks for good trading opportunities can be tough — even more so if you don’t have the medical or science background to separate the facts from the buzzwords.
Even so, we believe the sector as a whole has solid growth potential so you might find it easier to use a biotech-focused exchange-traded fund (ETF) like Direxion’s LABU and LABD leveraged ETFs for your trades. Direxion Daily S&P Biotech Bull 3X Shares (LABU) and Direxion Daily S&P Biotech Bear 3X Shares (LABD) seek to provide 300% or -300%, respectively, before fees and expenses, of the daily performance of the S&P Biotechnology Select Industry Index (SPSIBITR)**. The equal-weighted index exclusively tracks biotech companies with its top 10 holdings as of September 30, 2022 as follows:
- Biogen Inc. BIIB, 1.40%
- Apellis Pharmaceuticals Inc. APLS, 1.11%
- SpringWorks Therapeutics Inc. SWTX, 1.11%
- Global Blood Therapeutics PFE, 1.11% (Pfizer Inc. acquired the company this month)
- ChemoCentryx Inc. CCXI, 1.11%
- Biohaven Ltd. BHVN, 1.11%
- Neurocrine Biosciences Inc. NBIX, 1.10%
- Vertex Pharmaceuticals Inc. VRTX, 1.09%
- Crispr Therapeutics AG CRSP, 1.08%
- IVERIC bio Inc. ISEE, 1.06%
That 3X leverage magnifies the returns of each trade so you can receive more exposure to an opportunity you find. Of course, any losses would be magnified just as much so it’s important to establish strict entry and exit signals and to keep monitoring the market in case you need to make an early exit to cut losses.
We believe, as long as you are careful to manage your risk, though, that high leverage and the convenience of having both bull and bear ETFs means you have the flexibility to find promising trading opportunities in any market condition and then maximize those opportunities as much as possible.
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.
*Sources and definitions:
**The S&P Biotechnology Select Industry Index (SPSIBITR) is provided by S&P Dow Jones Indices LLC and includes domestic companies from the biotechnology industry. The Index is a modified equal – weighted index that is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards (GICS). One cannot directly invest in an index.
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. The Funds are non-diversified and include risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the securities of the Biotechnology Industry and Healthcare Sector. Companies within the biotech industry invest heavily in research and development, which may not lead to commercially successful products.
Additional risks include, for the Direxion Daily S&P Biotech Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily S&P Biotech Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
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