Are Biotech Penny Stocks Worth It?
If you’re an investor who isn’t afraid of a little risk, we have three words for you: biotech penny stocks. Combine the uncertainty of biotechs with the volatility of penny stocks and you’ve got a recipe for major boom-or-bust potential. Many investors see these stocks akin to buying a lottery ticket—and often, it is. The odds are just as dismal unless you’re prepared to dig in and do the legwork to look for diamonds in the rough.
The key to capitalizing on biotech stocks isn’t to find the lottery ticket: it’s to find the company poised for sustainable growth. While day traders and swing traders play the pump-and-dump cycles of biotech penny stocks, savvy investors will buy and hold a few gems that have real potential to break out and run. Here’s what you should know before investing in smaller biotech companies.
What Constitutes a Biotech Penny Stock?
There’s often a lot of confusion between a biotech stock and a pharmaceutical stock. Both companies primarily produce medicines and therapies. The difference comes from how they create these products.
- Biotechs derive their treatments from biological resources. For example, they might harvest disease antibodies from a patient and use them to factor an effective treatment against that disease.
- Pharma companies derive drugs and treatments from a chemical basis. For example, a pharma company might synthesize a type of protein, then use that protein to suppress an immune response prevalent in psoriasis patients.
There’s often a lot of overlap in the sector. A pharma company might contract with a biotech company to develop a special type of drug. Meanwhile, a biotech may use the research from a pharma company to fuel innovation in a biological therapy. There are pure plays on both sides, but the term “biotech” generally means a company that’s focused on biological solutions.
Why Are There So Many OTC Biotechs?
Many people interested in cutting-edge biotech stocks balk at the high share prices of established companies. Instead, they turn to more affordable penny stocks as an easy entrance into the market. And, upon further investigation, they tend to find no shortage of options.
There’s a wide range of biotech pennies. Why? There are many reasons biotechs tend to list off-exchange:
- They don’t have the capital to pay an exchange listing fee
- They don’t meet exchange listing requirements
- Poor balance sheets due to the nature of biotech
- May be a foreign company
Biotechs tend to trade OTC because it makes them more accessible to retail investors. This accessibility helps small biotechs access the capital they need to find their footing. It’s not uncommon for OTC biotech stocks to get listed as they seek to attract institutional investors with late-stage trials or marketable drugs.
The 2021 Run on Low-Cost Biotech Stocks
Coming out of a global pandemic in 2020, there’s never been a clearer focus on the need for better medicine. It’s not just about COVID-19, either. Immunology, hematology and even oncology are all booming sectors in biotech. There’s a clear focus on improving the standard of medicine in a post-pandemic world.
The momentum from 2020 has carried over into 2021. Now that the market has recovered from the pandemic, investors are getting bolder. They’re willing to put bets on unproven biotechs in the hope they’ll be the next company to launch a life-altering product. As a result, investors have started to go deeper to find value—right down to the penny stock level. These companies are unproven, but investor sentiment is still high.
Success Stories From Biotech Penny Stocks
What most investors want to know about biotech penny stocks is whether they’re a pipe dream or if there’s actual merit to a micro cap investment. There’s plenty of history that suggests opportunity.
Axsome Therapeutics Inc. (Nasdaq: AXSM) debuted a new drug trial in 2019: AXS-05, a treatment for depressive disorders. The drug earned the company an FDA Breakthrough Therapy designation, which sent the share price of Axsome Therapeutics Inc. skyrocketing. From 2019 to 2020, the stock gained 3,812%!
Another company that hit big on a successful drug trial was Provention Bio Inc. (Nasdaq: PRVB). A penny stock in November of 2018, the company saw great success from stage three clinical trials of its type 1 diabetes drug. By January of 2019, it went from pennies to just over $2. By the end of the year, it was trading for almost $15—and has maintained relative support since.
While many, many biotech pennies will never make it further than a few orphaned drugs, there are instances of a small company making it big. It’s just a matter of identifying them in their earliest stages of growth.
Are Biotech Penny Stocks Worth It?
What’s your risk tolerance? If you welcome risk with the potential for reward, biotech penny stocks are worth considering.
There are some promising options. ADMA Biologics Inc. (Nasdaq: ADMA) is deep into plasma-based antibody detection for COVID-19 and other viral infections. Companies like Osmotica Pharmaceuticals (Nasdaq: OSMT) show promising research into the use of psychedelic medicines to treat depression. And, of course, there’s a slew of gene editing biotechs trading for under $5 that could take off at any time.
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The wonder of biotech stocks is that they’re all just one big breakthrough away from major success. That makes biotech penny stocks even more exciting. There’s no telling if a stock worth a few bucks could end up making you a few million.
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