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As I wrote in a previous piece, biotechnology has been among the top performing sectors in the last twelve months. But how should investors trade the sectors from these levels?

It depends on the risk tolerance of each investor. Conservative investors should stay with the larger well-established companies like Amgen (NASDAQ:AMGN), Gilead Science (NASDAQ:GILD), and Biogen (NASDAQ:BIIB) with a portfolio of blockbuster drugs and strong fundamentals.

Company

Amgen

Gilead

Biogen

Forward PE

11.88

15.37

21.41

Operating Margin

34.54%

43.84%

34.08%

Qtrly Revenue Growth

13.10%

12.55

17.60%

Qtrly Earnings Growth

8.20

-4.6

34.30%

Source: Yahoo.finance

Aggressive investors may want to buy shares of smaller companies that have received FDA approval for new drugs like Medivation (NASDAQ:MDVN) for XTANDI (enzalutamide) for patients with metastatic castration-resistant prostate cancer; Onyx Pharmaceuticals (NASDAQ:ONXX) for Kyprolis that treats a rare blood cancer; VIVUS Inc. (NASDAQ:VVUS) for Qsymia (NYSE:TM) for the treatment of obesity; Arena Pharmaceuticals (NASDAQ:ARNA) for Lorcaserin that also treats obesity; and Affymax (AFFY) for its anemia drug OMONTYS.

The problem, however, is that FDA approval doesn't warrant success of a new drug. Dendreon's (DNDN) Provenge for the treatment of metastatic prostate cancer is a case in point. The drug appeared too expensive and its benefits too limited to be prescribed broadly. That's why the company's performance has failed to stand up to analysts' expectations, taking its stock has been on a rough ride - trading in the low $40s when it received FDA approval, down to $5 recently. Somaxion (NASDAQ:SOMX) is another case in point. On March of 2010, the company received FDA approval for its sleeping aid doxepin (Selinor). Yet the company failed to market the drug effectively - its stock dropped from $6.29 on the approval day to 30 cents today. Questor Pharmaceutical's (QCOR) is a third case in point. The company suffered a big setback in marketing its Acthar Gel as a major Aetna (NYSE:AET) dropped coverage of certain uses of the product.

Investors with an appetite for speculation may want to consider buying the stocks of biotech companies that have products in advance testing stages like Acadia Pharmaceuticals and BioSante Pharmaceuticals.

Acadia Pharmaceuticals (NASDAQ:ACAD). The company develops drugs for rare but devastating diseases like Parkinson's and glaucoma. Specifically, pimavanserin is in Phase III clinical development as a treatment for Parkinson's disease psychosis, AGN-XX/YY is in Phase II for chronic pain, and AC-262271 is in Phase I for glaucoma in collaboration with Allergan (NYSE:AGN).

BioSante Pharmaceuticals (BPAX). BioSante Pharmaceuticals is a pharmaceutical company developing cancer treatments, especially vaccines for rare forms of cancer that have received orphan drug designation (which increases patent protection). So far, the company has had several misses. That's why the stock has tumbled from $10, in 2005, down to $1.68 recently. However, the company has made progress in some areas, like the development of a pancreatic therapy that increases survival rates in early clinical trials, as reported recently.

The bottom line: Trading biotechnology stocks is all about the risk-reward preferences of different investors. Conservative investors should stay with larger well-established biotechnology companies. Aggressive investors should look into companies that have at least one drug FDA approved, while investors with a speculative appetite should consider smaller companies with drugs in late testing stages.

Source: 3 Ways To Trade Biotechnology Stocks