Published December 16, 2016

A Three-Step Guide to Making Life-Altering Gains in This “Risky” Industry

Editor’s note: We’ve all heard it before. If you want big returns, you have to take risks…especially in biotech stocks.

Biotech companies develop or manufacture new drugs. Many are trying to cure diseases like cancer. Because a successful new drug can be worth billions of dollars, biotech stocks can soar hundreds of percent in short periods.

They’re also very risky stocks. Many young biotech companies only have one or two products. Others haven’t made their first sale yet.

Chris Wood, editor of Extraordinary Technology, has figured out how to set his readers up for huge gains without exposing them to huge losses. You see, Chris has a proven system for finding small biotech stocks with massive upside. He’s been perfecting this method, which he calls the “3Cs of Biotech Investing,” for nearly a decade.

Today, Chris is going to walk us through the 3Cs. As you’ll see, this simple method could help you lower your risk while boosting gains in the volatile biotech space.

By Chris Wood, editor, Extraordinary Technology

If you’ve ever thought about investing in a biotech stock, make sure you print out this essay.

I’m going to reveal a tool that could mean the difference between life-altering gains and catastrophic losses in these stocks.

This tool is so important, you should never buy another small-cap biotech stock without using it… It will put you ahead of 99% of average biotech investors.

Let me explain…

Developing a new drug is a long and expensive process.

It takes anywhere from 10 to 15 years to get a new drug from the lab onto pharmacy shelves. And it costs anywhere from a few hundred million dollars up to several billion dollars, depending on the kind of drug and what it’s intended to treat.

According to a 2014 report by the Tufts Center for the Study of Drug Development, the average cost to develop a new drug that is approved to market and sell to people in the U.S. is $2.6 billion.

And the vast majority of drugs in development fail.

Only about one in 10 drugs that enter Phase 1 clinical trials (human trials) ever becomes an FDA-approved drug. For some difficult-to-treat conditions, like Alzheimer’s and ones that affect the central nervous system, success rates are even lower.

But the companies that successfully develop a new drug see enormous growth and profits… which can lead to massive gains for shareholders. Even drugs that eventually fail but show promise in early-stage clinical trials can make investors big money during the drug development process.

Consider CoLucid Pharmaceuticals (CLCD)… Tobira Therapeutics (TBRA)… and Sophiris Bio (SPHS). Each of these biotech companies is developing drugs. And positive news sent their share prices rocketing 771%, 298%, and 274%, respectively, over the past year.

So there’s no question that the biotech industry is exciting. And it can provide investors with mammoth returns in a short time frame if you know what you're doing.

Even if you know what you're doing, though, you will have losers.

The secret to being a successful biotech investor is to tip the odds in your favor and position yourself so your winners outnumber your losers.

One of the best ways to set yourself up to find big winners and avoid big losers in biotech is with my 3Cs of Biotech Investing tool.

The First C: Catalysts

The first C is all about finding near-term, value-driving catalysts in biotech stocks.

You see, a stock needs a reason to go up.

If a stock has no reason to go up for the next two, three, or four quarters, then why buy it now when you can buy it later for the same price?

That’s where catalysts come in. They’re essentially reasons for the stock to move higher.

Think of a catalyst as an event that is bound to move the share price. When it comes to small biotechs, there are a number of catalysts along the drug development road.

After a company files an Investigational New Drug (IND) application with the FDA and gets the go-ahead for human testing, the new drug passes through three major stages, and then a final evaluation, before it can go to market. The four major turning points in the process—during which the safety and efficacy of the drug are tested—are usually Phase 1, 2, and 3 trials and FDA approval or denial.

Each step can act as a boom or bust catalyst. Success or failure at the various stages can (and often does) translate into big gains or big losses for investors.

Often, a biotech stock's share price stabilizes in the "dormant" periods between the various clinical trial results or FDA news. But when a major catalyst approaches, investors often run the share price up in the hopes of good news. Then—depending on how the trial results are received by the market, or if FDA approval is granted or denied—the share price either jumps even higher or tanks.

The trick is to find a biotech stock that is currently off investors’ radar and between catalysts.

For example, I recommended Extraordinary Technology readers buy shares of Celsion (CLSN) in April 2012. At the time, I was expecting results from a major Phase 3 trial by the end of 2012. I also knew that the firm had enough cash on hand to fund operations well into 2013. The stock had been all but forgotten by investors and looked extremely cheap given the potential for Celsion's drug.

But as the expected date for the trial readout approached, investors piled into the stock. They bid up the price more than 70% in the first three months we held Celsion. So in July 2012, we sold our risk capital and rode the gains. And the stock continued higher still. It blew past our price target in the weeks leading up to the trial readout, so we sold our remaining shares on November 27, 2012, for a total gain of 167% within just seven months. You can see the stock’s massive move higher in the following chart.

These are the kinds of gains you can see if you find biotech stocks with near-term catalysts. Of course, finding companies with positive catalysts is just the beginning. You don’t want to buy the stock of a company that is going to run out of cash before the catalyst occurs.

That brings us to the second C…

The Second C: Cash

Once you find a company with a near-term, value-driving catalyst, only invest in it if it has enough cash on hand to take it past this catalyst.

Cash is the lifeblood of all businesses. They need it to pay their employees, to buy materials to make their products, to invest in new plants and equipment for growth, to fund research and clinical trials, to pay interest on debt, and to pay dividends.

In other words, cash is everything for a business.

With no approved drugs, most small-cap biotechs are essentially pre-revenue companies. So they typically generate most of their cash by selling stock, because it costs a lot for these companies to borrow money and they don't want to load up their balance sheet with debt.

If a small biotech company is going to run out of cash before reaching its next value-driving catalyst, then it will inevitably have to sell stock before that event. And that sale will take place at a low valuation. This dilutes existing shareholders and tends to send the stock lower… possibly to the point where an eventual big jump in the stock price can't turn your investment into a winner.

So if a company has a big catalyst that I think will work out a year from now but only has six months of cash left, then I wait for the inevitable stock sale. Then I buy in when the company has enough money to take it through its next value-driving event catalyst.

The Third C: Captivating

After you find a stock that has a value-driving catalyst and enough cash to last through that event, the third C is to make sure the company can captivate investors.

The more captivated investors are by a company and its new drug, the more they will respond to the company’s value-driving catalysts. In short, the more captivating a biotech stock is, the higher its stock is likely to go.

That happens when you have a small company that’s solving a big problem… like developing a cure for diabetes or hepatitis C.

A new generic drug that treats a common disease could make for a decent investment over time if the company is well run and captures more market share than expected. But it’s not going to captivate investors because it’s entering a crowded market.

Putting It All Together

I can’t guarantee that, if you follow my 3Cs of Biotech Investing, every trade you make will be a winner. Investing in small biotech stocks is not for the faint of heart. It requires massive amounts of research, due diligence, patience, market awareness, timing, and luck.

But if you follow the 3Cs of Biotech Investing, you’ll be ahead of the vast majority of investors.

Editor’s note: Chris recently used his 3Cs to identify a biotech stock with 200% upside. This company has developed a revolutionary painkiller that isn’t addictive and doesn’t have the same side effects as other opioids. It’s helping millions of Americans live with pain AND solving America’s opioid epidemic.

In just six weeks, this stock has soared 60%. Chris doesn’t think you should chase the stock higher after its explosive run. It’s above his “Buy Under” price.

The good news is that Chris knows about an even bigger opportunity in the tech space right now. You can learn about it by watching this brand-new video. As you’ll see, money is already starting to flood into this emerging technology.

Chris is so convinced this industry will deliver investors huge gains, he recently told his readers about THREE ways to profit from it.

You can get in on these stocks today by signing up for Extraordinary Technology. But we encourage you to watch this free video first. It also explains how to access Extraordinary Technology for 60% off the regular price.

Click here to learn more.