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2 Tips for Investing in Biotech Stocks with High Growth Potential

The biotech industry is an odd part of the stock market because it is highly regulated by the federal government. Therefore, pharmaceutical companies must first demonstrate that their drugs are safe and effective through clinical trials before they can market them to doctors.

From a healthcare perspective, this makes a lot of sense. But from a financial standpoint, it’s a bit odd.A biotech company has to spend a lot to make money any money. If the drug fails clinical trials, the company may not make money at all.

That could be scary for investors. Still, many biotech companies go public with no profit or revenue precisely because their need for cash is so great. In the biotech space, investing in stocks without drugs on the market has become the norm (albeit scary).

And, in fact, people can and do make money. Here are two suggestions on how I should handle it.I would use Novax (NVAX 2.80%) and Nano-X imaging (NNOX 1.86%) as an example.

1. Take the time to research small and microcaps

I bought Novavax at $6 and $4 per share with great success. When I first bought, the company was a tiny microcap. More than a year after I bought the stock, the share price soared to $330 per share. For me, that’s about 60 pounds.

One happy lesson I’ve learned from the Novavax experience is that it’s a good idea for biotech investors to make small investments in small stocks of promising science. By small stocks I mean stocks that are trading below $10 or have a market cap below $1 billion. You want to look for low-key stocks.

When I bought my stock, the market hated Novavax. The company must undergo a 20-to-1 reverse split to remain listed on the Nasdaq. In November 2019, the market value shrank all the way to $106 million.

Now fast forward to February 2021. Same company, same CEO, same scientist – it’s a completely different situation. That month, Novavax reported positive Phase 3 data from its COVID-19 vaccine trial. Many have called the vaccine best-in-class.

A few days later, when the stock hit $330 a share, the company was valued at $19 billion. Given how big the market opportunity is for a COVID vaccination, and how good the company’s numbers are, many (including yours) believe Novavax stock is still undervalued.

Market pessimism about the stock peaked when Novavax traded at $4 a share in November 2019. This is most optimistic when Novavax shares hit $330 in February 2021. In both cases, Novavax had zero drugs on the market.

it is dangerous Buy $19 billion worth of biotech without any drugs on the market. I didn’t buy Novavax for $330.But my family did buy bluebird creature (blue 6.50%) $220 per share. It was a $10 billion biotech with no drugs on the market, and we watched it drop all the way down to single digits.

So here’s my first tip for investing in biotech without any drugs on the market: When you make your initial investment, stick to cheap stocks, micro and small caps with great science and great prospects. Make sure your company has enough cash to bring its top drug prospects to market.

If you support a winner, let that winner run! I didn’t make any profit until Novavax’s stock was over $80. I made more profits at $125 and $330 and bought them back when the stock price fell sharply. But my key to great returns was the first early purchase in Novavax’s darkest days.

2. Find a moat

Biotech stocks are technology companies. I like tech stocks because they can scale quickly and make a lot of money for investors.

But perhaps the most exciting thing about tech stocks is that a company may have a moat that gives it an edge over its competitors. Some moats I like include subscription services, the razor and blade model, and network effects.

Are there healthcare companies with no moats? Absolutely. Intuitive surgery (ISRG 1.00%) has a moat, and utility (documentation -1.83%) There is a monster.I think enter mode (INMD 2.61%) There is also one. I own all of these healthcare stocks because they are lucrative and also because these companies have a big advantage over their competitors and can scale and scale.

Finding a moat is a way to “value” a biotech stock even if it doesn’t have revenue or profits yet. Nano-X has a completely different X-ray machine than what is on the market today. The company’s device relies on cold cathode technology, making it a much cheaper device ($10,000 to manufacture compared to $1 million for a high-end CAT scanner).

But the biggest news is the business plan. The company will give away the machine (razor) at or below cost and make money (blade) each time the machine is used. It’s this fantastic business model that reminds me of the moats in some of my top-returning stocks. That’s why I’m highly bullish on Nano-X. For a while, the market felt the same way, with shares surging a lot.

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As we saw at Novavax, in biotech investing, you often see a lot of volatility and extreme changes in valuations. We’re seeing this now with Nano-X. It’s 2022, and high-end devices haven’t hit the market yet. Impatient investors have sold the stock, taking it from a high of $90 all the way down to $9 in April. But (and this is the important part), there’s no real bad news from the FDA yet.

In the field of biotech investment, the FDA is the biggest stumbling block and the most important issue. If Nano-X’s device gets FDA approval, that’s a happy day. If it gets blocked, disaster. My way of increasing risk-reward ratio is to add stocks when they are super cheap.

Taylor Carmichael has held positions at Doximity, Inc., InMode Ltd., Intuitive Surgical, Nano-X Imaging Ltd. and Novavax. Motley Fool holds positions and referrals at Doximity, Inc., InMode Ltd. and Intuitive Surgical. The Motley Fool recommends Bluebird Bio. The Motley Fool has a disclosure policy.

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