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How to Trade the FDA Approval Game

Posted May 11, 2021

Biotechs have been a great investment for the past 10 years. Faster computers, big data processing, and advancements in understanding DNA have created new cures for everything from certain types of cancer to hepatitis C.

If you had put $10,000 into the VanEck Vectors Biotech ETF (BBH) 10 years ago, you’d have $144,000 today.

BBH 10 Year Chart

The BBH chart is bullish. It shows a consolidation pattern from 2015–2020 followed by a breakout. The rule of thumb is that stocks will move higher about as much as they move sideways. Judging by that, this biotech ETF has a lot of room to run higher.

The downside to the ETF is that it holds all of the blue chip stocks that are low risk and medium reward. Its largest holding is Amgen (NASDAQ: AMGN) at 9%, which is a $145 billion company. It might jump 1,000%, but that's unlikely at this point.

The really big gains come from small value winners like Novavax (NASDAQ: NVAX), which was trading at $4 a share before it shot up 5,000% in 2019–2020.  Novavax makes vaccines, which caught investors' attention during the pandemic.

Three Phases of Biotech Profits

How do you get the big winners in biotech? You play the FDA approval system.

In order to get FDA approval and become a drug that is dispensed to the public, the new treatment must undergo three trial phases. These take many years and cost millions of dollars.

Phase 1

Phase 1 consists of a small number of healthy volunteers. The researchers want to know how the drug or therapy relates to the human body and whether it is safe. This trial occurs early in the process and is not investable.

Phase 2

In the Phase 2 trial, the company tries to prove a drug works against the intended disease and is safe. These studies usually consist of a few hundred people with a control group. These are investable. Positive Phase 2 data can send share prices higher. This is often followed by a sell-off as early investors take profits.

Only 11% of drugs make it from Phase 2 out to the general public.

Phase 3

Phase 3 is the big deal. It is a multiyear study with a large number of patients. It seeks to prove that the drug is safe and effective.

After a positive Phase 3 trial, the company hits up the FDA for approval. Positive Phase 3 trials can and do launch biotech stocks.

FDA approval sends the share price even higher. For example, in December 2019, the FDA approved Caplyta (lumateperone) for treating schizophrenia in adults. Intra-Cellular Therapies Inc. (NASDAQ: ITCI), the maker of the drug, jumped 178% the very next day.

My good friend and associate Keith Kohl has developed a system that tells you when Phase 3 trials are going to be announced. Furthermore, it has a proprietary "tell" that lets you know which ones are most likely to succeed. Keep your eyes peeled for an invite to a webinar that explains this groundbreaking system. The next profit opportunity is coming up fast.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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