One of the stock market’s strongest sectors over the last few years has been biotechnology stocks. It’s a very tough group in which to be a speculator, because you cannot predict discoveries or approvals. What you can do, though, is play the news flow while gauging sentiment in the stock market.
The NASDAQ Biotechnology Index has been on a tear for the last four years, and according to Reuters, the U.S. Food and Drug Administration (FDA) approved 39 new drugs and biological products last year. This compares to 30 in 2011 and 21 in 2010. It is the highest number, beating the previous high reached in 1996, when 35 new drugs were approved. (Source: Hirschler, B. and Humer, C., “FDA new drug approvals hit 16-year high in 2012,” Reuters, last accessed March 21, 2013.)
On the stock market, anything can happen with biotechnology stocks, and you can lose your shirt pretty quickly. Opko Health, Inc. (NYSE/OPK) is one of those biotechnology stocks that perfectly illustrate the challenges of trading in the group.
Opko is a biotechnology aggregator; it has its hand in a lot of developments. The company is run by Dr. Phillip Frost, who became a billionaire when he sold his last pharmaceutical company to a major drug manufacturer. Opko’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
For months and months, Frost was buying shares in Opko Health on the stock market (all open market, public and documented), but the price didn’t move. This went on and on until the company announced an expanded collaboration with Bristol Myers-Squibb Company (NYSE/BMY) for one of its diagnostic tests. Then, bam! Opko’s shares exploded on the stock market.
Biotechnology stocks are like this, but the tough part is that you have to be watching them all the time. (See “High Risk, High Reward—Two Great Companies for Traders.”) They can also move in the opposite direction with equal fervor.
The NASDAQ Biotechnology Index has continued momentum. The good thing about most biotechnology stocks is that they have little correlation to the broader stock market; they dance to their own tune, for sure.
Because there is so much money in pharmaceuticals, institutional participation within the sector is very strong. Among developing biotechnology stocks, virtually the only players are institutions (and billionaires).
A trader can piggyback on the news in biotechnology stocks, but you have to be prepared to quickly jump ship. The action in this group continues to have momentum, and FDA approvals should maintain a strong pace this year. The whole sector is, of course, 100% speculative.