I Don’t Understand Investing in Small Cap Pharmaceutical and Biotech Companies

by Evan

One of the places I check for ideas/inspiration to sell puts for income is the Yahoo Finance page’s “Losers” for the day.  It provides a snapshot of companies that have taken an unusually large hit for that day.  I use this page to scout out any names that look familiar to me (i.e. if Nike takes a few percentage hit, I know Nike will be around in a few months so that is where I start my research for selling puts).  What does this have to do with Pharmaceutical and Biotech Companies? Everyday, day in and day out, they make up the majority of the list.

Extreme Volatility

Example of Daily Stock Losers List

Today’s List:

Symbol Last Price Change % Change Volume Avg Vol (3 month) Market Cap
ADHD 0.94 -0.96 -50.66% 6.16M 391,143 25.836M
Alcobra Ltd. 391,143
ETRM 8.9 -4.8 -35.04% 5.04M 11.945M 24.355M
EnteroMedics Inc. 11.945M
GLBS 4.85 -2.39 -33.01% 1.38M 711,598 12.744M
Globus Maritime Limited 711,598
CBK 1.42 -0.68 -32.38% 3.35M 279,051 53.11M
Christopher & Banks Corporation 279,051
APOP 3.61 -0.74 -17.01% 134.82k 134,166 20.654M
Cellect Biotechnology Ltd. 134,166
PFNX 7.62 -1.4 -15.52% 159.93k 67,008 178.446M
Pfenex Inc. 67,008
PRGS 27.63 -4.62 -14.33% 1.38M 200,648 1.343B
Progress Software Corporation 200,648
ARTW 3.15 -0.52 -14.26% 17.71k 8,882 12.944M
Art’s-Way Manufacturing Co., Inc. 8,882
CNCE 9.01 -1.46 -13.94% 186.73k 142,264 200.691M
Concert Pharmaceuticals, Inc. 142,264
DRYS 1.6 -0.25 -14.44% 28.982M 9.893M 54.09M
DryShips Inc. 9.893M
EVC 5.6 -0.85 -13.18% 1.64M 289,200 449.835M
Entravision Communications Corporation 289,200
BAC-WTB 0.91 -0.13 -12.84% 850.15k
Bank of America Corporation Cla
BIOC 1.83 -0.26 -12.44% 6.01M 1.884M 32.024M
Biocept, Inc. 1.884M
KODK-WT 3.1648 -0.4452 -12.33% 10.32k
Eastman Kodak Company Warrant (
SSH 7.18 -1.01 -12.33% 141.62k 1.852M 5.574M
Sunshine Heart, Inc. 1.852M
ANET 88.23 -12.04 -12.01% 4.58M 709,738 6.195B
Arista Networks, Inc. 709,738
STI-WTB 12.15 -1.65 -11.96% 1.83k
SunTrust Banks, Inc. Class B Wa
BOLD 15.77 -2.12 -11.85% 50.39k 62,517 342.606M
Audentes Therapeutics, Inc. 62,517
BBGI 6 -0.8 -11.76% 30.94k 7,596 172.649M
Beasley Broadcast Group, Inc. 7,596
TDW 2.27 -0.29 -11.33% 2.96M 2.445M 106.845M
Tidewater Inc. 2.445M
CMA-WT 36.03 -4.57 -11.26% 6.85k
Comerica Incorporated Warrant e
PLG 1.58 -0.2 -11.24% 1.79M 517,483 143.292M
Platinum Group Metals Ltd. 517,483
XNCR 23.31 -2.85 -10.89% 457.22k 302,774 1.066B
Xencor, Inc. 302,774
HOLI 17.18 -2 -10.43% 1.52M 287,811 1.028B
HollySys Automation Technologies, Ltd. 287,811
DMRC 26.35 -2.95 -10.07% 199.53k 58,225 265.687M
Digimarc Corporation 58,225
IDXG 4.86 -0.52 -9.67% 306.93k 5.046M 10.577M
Interpace Diagnostics Group, Inc. 5.046M
EGLT 5.34 -0.56 -9.49% 1.15M 832,935 131.444M
Egalet Corporation 832,935
ZAIS 1.55 -0.16 -9.36% 19.63k 79,372 32.396M
ZAIS Group Holdings, Inc. 79,372
FFKT 39.85 -4 -9.12% 86.79k 43,306 299.177M
Farmers Capital Bank Corporation 43,306
AIII 1.1 -0.11 -9.09% 53.41k 28,354 23.384M
ACRE Realty Investors Inc. 28,354

Of the 30 stocks listed a good third are involved in the medical space. I understand that I am only presenting one day’s data, but it is consistently the same.  It wouldn’t make me feel better to know the opposite picture (day’s gainers) had the same percentage in small (or micro) cap pharma or biotech companies.  In fact, it would make me feel worse! That is some tremendous volatility.

You are Investing Based on Someone’s Hearsay

I have a hard time believing that most people jumping into a $25,000,000 company found that company through a credible stock screen.  It is more likely they heard from a guy who heard it from a guy who heard it from a 3rd guy that the government is going to approve some new drug or some huge contract is going to come through.  It gets worse when you find yourself on some message board since everyone there is likely to be a cheerleader.

You not only have to Get the Market Right You Need to Get the Medicine Right

The Federal Drug Administration is one hell of a formidable speed bump if you are bringing a drug or medical device to market.  I, as a consumer, for the most part is comfortable making it extremely hard to bring something to market.  Does this prevent some drugs from coming to market that probably should? I would assume so, but this isn’t the place to debate the issue.  Rather, the point is that not only do you have to get the market for the drug correct (i.e. there is a demand), you have to get it through multiple stages of the FDA.

These companies are so tiny that even the slightest hiccup crashes the stock!

People Can Make Money but it Won’t be Me!

Without insider information, of which I am not willing to participate, I can’t imagine how I could make money investing in these tiny pharma and biotech stocks.  Even if I read their 10-K report there is zero chance that I would understand anything that is going on.  Where do I even begin understanding that drug xyz alters your chromosomal makeup to suppress your need to eat absolute garbage? Let’s assume that I could, somehow, understand it – do you think a retail investor is really going to receive the information to truly know whether the tests are going good with the FDA? I think not.

Ever get lucky on one of these types of companies?

 

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5 comments

Buy, Hold Long January 18, 2017 - 6:55 am

A lot of the time they are just money pits and the CEO is getting paid something ridiculous. I try to stay clear of any new companies unless I completely understand their business model.

Reply
Evan February 15, 2017 - 2:03 pm

There is a lot of money to be made in space but you and I won’t be a part of it! AND THAT’S OKAY!

Reply
DividendMonkey January 23, 2017 - 6:54 pm

I like well know dividend companies myself. I understand how they are making money and paying me. With all the stocks in the world, I cannot possibly know them all. Do they pay a dividend makes a nice filter for me.

Reply
Evan February 15, 2017 - 2:04 pm

I like the idea of a growing dividend as my benchmark…so I turn to the dividend champion and dividend contender list.

Reply
Roadmap2retire October 28, 2017 - 1:38 pm

Biotech is something I know nothing about and haven’t had any speculation in the space. Volatility may be a good thing if you are speculating and make the right bet, but hard to know which company will come upon something that looks promising.

Reply

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