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:

SymbolLast PriceChange% ChangeVolumeAvg Vol (3 month)Market Cap
Alcobra Ltd.391,143
EnteroMedics Inc.11.945M
Globus Maritime Limited711,598
Christopher & Banks Corporation279,051
Cellect Biotechnology Ltd.134,166
Pfenex Inc.67,008
Progress Software Corporation200,648
Art’s-Way Manufacturing Co., Inc.8,882
Concert Pharmaceuticals, Inc.142,264
DryShips Inc.9.893M
Entravision Communications Corporation289,200
Bank of America Corporation Cla
Biocept, Inc.1.884M
Eastman Kodak Company Warrant (
Sunshine Heart, Inc.1.852M
Arista Networks, Inc.709,738
SunTrust Banks, Inc. Class B Wa
Audentes Therapeutics, Inc.62,517
Beasley Broadcast Group, Inc.7,596
Tidewater Inc.2.445M
Comerica Incorporated Warrant e
Platinum Group Metals Ltd.517,483
Xencor, Inc.302,774
HollySys Automation Technologies, Ltd.287,811
Digimarc Corporation58,225
Interpace Diagnostics Group, Inc.5.046M
Egalet Corporation832,935
ZAIS Group Holdings, Inc.79,372
Farmers Capital Bank Corporation43,306
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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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.

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!

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.

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.

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.


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