How to Tell If Your Biotech Micro Cap Has Big Potential
There are two main guardian indicators to look for when assessing the risk for a micro cap: management and platform/development model.
Management: Many a biotech firm starts as the brainchild of some scientific researcher, working anonymously and unheralded in an obscure university lab, who has come across an interesting discovery that suggests a new approach to treating some particular disease.
And so the researcher finds seed money from private investors or a grant-making foundation, gets a company logo, appoints him or herself as CEO, and goes to work. Eventually, it may come time to make an IPO (initial public offering) and bring investors on board.
At first, with every quarterly report, the news seems to get better. But sooner or later, the company repeatedly fails to meet its guidance, and the stock shares lose much, if not all, of their value.
What happened?
Wrong pilot at the helm. Scientists do science well. Business people do business well. Crossovers do happen – but not dependably or often.
Which leads us to this rule: Be very, very suspicious of company management headed by a scientist who has no business experience. These folks believe passionately in what they're doing, and they'll get you to believe passionately right along with them. But going from scientific passion to financial success should ultimately fall to the hands of someone with experience making that journey.
A company's chief science officer, of course, should be just that: a scientist. But in a CEO, look for years of experience in company and capital formation, market development, mergers and acquisitions, licensing, and corporate governance.
That won't guarantee your success, but it will go a long way in protecting against failure.
A solid development plan: For you to assess how your equity is doing at any given point, you need to have touchstones against which you can measure success or failure, and this is as true for micro caps as it is for pharmaceutical giants.
This means the firm you're investing in needs to have a solid business model (a plan for getting to profitability), a strong platform (a credible scientific basis for its pipeline development program), and mile markers, such as binary regulatory catalysts (clinical trial data releases and company guidance goals) that will help push share value upward.
Very often, you can find this kind of information in corporate presentations and quarterly earnings call transcripts, which you'll generally find on a company's website.
Look for well-defined goals, not pie-in-the-sky daydreams. There's a lot of space between "…We hope to cure lung disease someday," and "…We're initiating a phase 2 study for our medication in the treatment of bacterial pneumonia, starting next quarter."
Look for numbers: "We expect to earn $3 million in revenue per quarter in the coming year, a 3% gain over last year's numbers for the same time period," and not, "The company hopes to continue its positive progress in the coming months."
Look for dates: "We expect to announce topline date from our phase 2 trial by the end of Q3 2019," and not, "We continue to collect proof of our product's value and hope to have it ready for marketing next year."
Oh, and be sure the company is reporting regularly and promptly to the SEC, as required by law. If it doesn't, it will be delisted from exchanges like the Nasdaq.
The Trend Is the Ultimate Test
Once you're past these first steps, the one thing you need to consider before all others is this: Is this company's pipeline taking advantage of a fad or a trend?
Because it absolutely should be.
What is the health reporter on your local TV station talking mostly about? What kinds of medical stories are showing up on satellite radio or your go-to website? What sorts of health stories are you hearing from your friends and family?
"I hear they've found a cure for diabetes."
"There's this fabulous new diet pill that's supposed to work overnight."
"Did you hear all these Hollywood stars are having their double chins reduced?"
"It says on the news that West Nile Virus is spreading everywhere, but they're coming up with new vaccines every day."
If it's in the media, it's giving audiences a taste of hope, and that hope builds interest until it becomes a trend.
Any young company lucky enough to be riding that trend, even if it doesn't yet have an extensive clinical paper trail, can whet investors' interest and make strong profits in a short period of time.
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AI
