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Investing in Biotech: Is now the right time?

derailedcapitalism's Photo
by derailedcapitalism
Friday, May 14, 2021 - 12:07

Currently, there’s a lot of volatility in the markets for investors to contend with, and the CBOE Volatility Index (^VIX) is proof beyond doubt of that. In late Jan 2021, when the battle between Reddit and hedge funds raged, the index hit its highest levels (37.21) in 2-years. Today, the VIX stands at 25.00 – not as high as earlier this year, but still much higher than the 16 levels we saw 2-years ago.

What does this mean? Three words: Do your diligence!! Before you put money into a portfolio, look carefully at the sectors you want to invest in. And while there’s a cautionary note in that statement, there’s also a message of optimism: If you look for them, you’ll still find value in certain segments of the markets, and the Biotech sector is one of them. 

Exceptions to the Rule 

Generally, small and micro-cap companies, which describe many biotech ventures, are more prone to volatility than their larger-cap counterparts and peers. Additionally, many startups, and some newly established biotech businesses, also don’t have “real” revenue, since they typically depend on venture capital to fund their operations. Understandably, some investors might shy away from such companies. 

Some biotech companies are, however, an exception to that generic view of the sector. And in today’s world, where biotechnology and breakthrough research in COVID-related preventive and treatment vaccines is critical, micro-cap biotech companies are working hard to fit into that exemption.

 

Look at the ETF that’s a proxy for the Biotech sector - iShares Nasdaq Biotechnology ETF (IBB). During a pandemic year, this ETF has gone up by over 15%. Why is that significant for biotech? Because comparatively speaking, the broader investment biosphere, as highlighted by the long-term average return of the broader S&P, has returned just 6.17% - that’s nearly 9% better return from biotech than the benchmark index for the broad stock market.

But there’s an even stronger case to for investing in biotech now. Firstly, the fruits of many biotech companies’ research, that treat coronavirus-2 (SARS-CoV-2), or COVID-19, and SARS-CoV-2, are currently in high demand. And that demand is not likely to ebb in the short term. As investors with a longer-term view therefore, adding exposure to biotech now is a smart move.

Another strong case for exceptional biotech investment comes from surveying alternate investment thesis. For instance, investors typically see gold as a safe-haven investment when looking to ride out a volatile patch of investing weather – which could fit the current climate we’re in. 

So, how have gold investors fared over the course of the past one year? IBB (the ETF proxy for the sector) is up by more than 11.5%, relative to SPDR Gold Trust (GLD) - the proxy ETF for Gold - which is up by less than 6.5%. What does that say about biotech as an investment idea? It highlights that biotech is still a better investment proposition than some traditional flight-to-safety investments.   

We’ve seen that biotech certainly has rewarded investors, viz. gold investments, in the short term. But, before we make an assumption that biotech is truly the exception to the rule for cautious investment pessimism, let's look at the sector from a much broader lens.  How did the biotech sector perform, versus a broad-based basket of sectors, in the longer-term?

 

When you compare biotech’s 10-year track record against several other sectors, including: 

  • Gold - SPDR Gold Trust (GLD)
  • Financials - Financial Select Sector SPDR Fund (XLF)
  • Air travel - US Global Jets ETF (JETS)
  • Transportation - iShares Transportation Average ETF (IYT) 

…we find biotech (IBB) still outperforms them all by a significant margin. This clearly shows that biotech is the sector to be in, not just for the short-term, but also if you are looking for longer-term returns in your portfolio.

What to Look For?

Now, more than ever, is a time for investors to be extra diligent in the specific stocks they pick within every sector they invest in – and that goes for biotech names too. So, how do you kick the tires to ensure which biotech stocks to invest in? 

Well, here are some things to look for in a biotech name: 

a) What are they into? Currently, the most demand is for antiviral drugs and therapies. Specifically, companies involved in COVID or SARS-related research and development are the best place to invest

b)   What have they accomplished? Look for clinical data results, because that’s what typically drives stock price performance. Opting for companies that are in early to late-stage clinical trials, or who are significantly on their way to that milestone, is a promising biotech investment strategy. Stay away from those that only unveiled a concept or only have a published “whitepaper” or two

c) What the future holds? While all biotech research is invaluable, especially for patients waiting hopefully for a breakthrough, some companies’ R&D holds more promise than others. With viruses like SARS- CoV-2 (the COVID virus) potentially set to be around for a while, and with many mutations and variants evolving, biotech companies in that space are worth investing in now

d)   Are they diversified? Even within a narrow sub-field, such as vaccines or COVID-specific treatments, biotech companies that have multiple programs on the go are a better bet than the “one and done” candidates that bet the company’s future on a single platform or program

e) What partnerships do they have in place? Biotech companies typically don’t have large cash hoards to burn. Therefore, they often partner with industry leaders to continue work on their own platforms. And those partners – usually large hedge funds, venture capitalists, biotech or pharma companies, or research institutions of repute – conduct stringent diligence before investing or partnering with micro caps. That’s the type of validation biotech stock investors should look for in a prospective investment candidate. Solid partnerships = sound investment prospects! 

Of course, as with any sector that you might choose to invest in – be it financials, technology or oil and gas, there’ll always be sector-specific risks. Biotech is no different. Regulations may change, test results might not be as promising as expected, or the general investment climate might deteriorate.  And that’s why you pick companies that are in a great position to mitigate these risks. 

Companies to Look At

As with component companies in any sector that you’re investing in, not every biotech company is the same. Here are three promising biotech companies to consider adding to your portfolio now: 

BioVaxys Technology Corp (BIOV.CN)

The world is currently in the grips of a COVID pandemic, and we need our best biotechnologists working to see us through the crisis. BioVaxys Technology Corp. (BIOV.CN), is a clinical biotechnology company that develops antiviral and anticancer vaccine platforms. 

One such innovation is Covid-T™, the world’s first low cost, disposable, diagnostic to identify a T-cell immune response to SARS-CoV-2. The unique technology developed by the company don’t just alert physicians and clinicians about current forms of viruses associated with Covid, but holds great promise for detecting T cell responses to new mutated variants strains of SARS-CoV-2 that are spreading worldwide

  

Since late 2018 ($0.06), the stock has seen an impressive 333% spike ($0.26) in its price.

Mountain Valley MD (MVMD)

Typically, some companies in the biotech space are what analysts call “one trick ponies” – they have just one iron in the fire, and that’s all an investor must hang on to. Because they hang hopes on a single program or drug, the risks of failure are high. But with Mountain Valley MD (MVMD), that’s not the case. This company has a long list of promising programs in its pipeline, including: 

  • Dose Sparing Adjuvant, which is aimed at using less vaccine per dose, contributing to increased vaccine output and overall cost reduction
  • Cold Chain: That promises overall vaccine efficiency by enabling distribution outside of cold chain
  • Ivectosol™: A promising human intratumoral injection and intravenous-infused cancer treatment currently in pre-clinical trial stage, for which patents have also been filed
  • Insulin Program: Which is a breakthrough approach for needleless, easy-to administer and precise dosage of the medication, with reduced variability

 

The stock is up over 88% YTD, and with the company hopeful of receiving more good news in the coming months, analysts expect investors will be handsomely rewarded. 

Update: The Company has recently received cold chain ELISA data from the Food and Drug Administration and is currently coordinating an analysis review.  

Cocrystal Pharma, Inc. (NASDAQ: COCP)

A very topical subject these days, in biotech circles, is research and development of antiviral breakthrough therapies, treatments and technologies. And that’s precisely where Cocrystal Pharma, Inc., (COCP) has its strength. Its antiviral therapeutics are designed to destroy and disrupt the replication capabilities of influenza viruses, the SARS-CoV-2 virus, hepatitis C viruses and noroviruses. 

Unlike many of its peers, COCP is well regarded by other global biotech players, including Merck Sharp & Dohme Corp., Kansas State University Research Foundation and HitGen and InterX Inc., all of whom have collaboration and/or license agreements with the company. 

 

Patient biotech stock investors recently saw the company’s stock gain nearly a full percentage point in price appreciation. The company also closed 2020 with $33.1 million in hand, and a significantly reduced loss per share (down from $1.51 to $0.17).   

Biotech - No Time Like Now 

The ongoing COVID pandemic has hit many sectors of the economy, delivering huge investment losses to many portfolios.  However, due to the timely and topical nature of the products and services it offers (in the vaccine and antiviral therapies and treatment sphere), the biotech sector remains strong. It not only continues to survive, but over the long haul has thrived relative to other traditional safe-haven sectors.

If you don’t already have exposure to the sector, now is a great time to add biotech to your portfolio. And the three names discussed above would make the perfect start to gain exposure to the sector. Over the past year, a basket of these three stocks has returned an impressive average price appreciation of more than 266%. 

Worried that one of your picks has shown a decline in price? Don’t be! If you are a long-term investor, you’ll realize that these spikes (ups and downs) in price movements happen, even with stocks in some of the traditional “solid” sectors. The great thing about biotech is that just a hint of good news about the stock – a successful clinical trial, a new licensing agreement, or impending regulatory approval - can instantly help propel the stock price up. 

 

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