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How to Play a Biotech Breakout

Posted January 07, 2022

Ray Blanco

By Ray Blanco

How to Play a Biotech Breakout

It’s no secret. 2021 was an awful year for small biotech companies. 

After reaching all-time highs early last year, small developmental-stage biotech went on a bad slide. 

Were investors who sold off small biotech after all-time highs fatigued with the biopharma side of the COVID-19 story and dumping the baby along with the bath water? 

Did pressure from Congress and the White House to reform drug pricing weigh down on the sector?

Did investor risk appetite for companies with no revenues, seen in other areas, knock down pre-revenue stage biotech too?

Was the biotech correction just a rotation out to more seemingly attractive market segments?

Did a relatively large number of FDA drug application rejections just sour investors?

The reasons are debatable, and what we saw last year is probably a combination of all these factors and others.

But overall, most of 2021 was one of the worst times ever for biotech in the years I have been tracking the space. 

But that means that biotech companies are really cheap right now. And that makes them really attractive buyout candidates.

Big Pharma is always looking for a deal. It has good reasons to do so. Their products are like a COVID-19 vaccine at room temperature: The shelf life is limited. The high profit margins on new drugs are perishable. 

The ending of legal monopolies always kills pharmaceutical cash cows. Blockbuster drugs are always going off patent, to be replaced by much cheaper generics and biosimilars.

The organic solution for Big Pharma is to always be developing new drugs. But many great new therapeutic platforms end up at smaller biotechnology companies. Originally ignored by Big Pharma, experimental drugs sometimes generate strong clinical data. At other times, drugs might already be approved for marketing, but without the synergies and marketing prowess of Big Pharma names. 

For these reasons and more, new drugs and the companies that own them can be attractive bolt-on additions for Big Pharma, and that’s why quality small biotechs often produce big overnight gains.

Investors can make fast gains on biotech buyouts. Overnight, the news hits the wires: A bigger (usually MUCH bigger) pharmaceutical company swoops in and announces it is buying up a small biotech company for a huge premium over the previous day’s closing price.

Boom! You can see overnight gains of 50% and even more!

To a bright future,

Ray Blanco

Ray Blanco
Chief Technology Expert, Technology Profits Daily
AskRay@StPaulResearch.com

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