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Effectively Trading BioTech Stocks using the "Run-Up" Method

Let’s start with a simple definition of the “Run-Up Method”  Simply put, it is the following:

“Buying a stock months before a catalyst date and selling before the catalyst date.”

This currently is my preferred method of trading biotech stocks.  It takes a little more patience, but as a wise trader once said “Patience Pays” (thanks Trants).  In the world of stocks, most investors would hardly consider holding a position for only 3-5 months ‘long’.  But as most traders know, this may seem like an eternity.

Holding through an FDA decision is a VERY risky maneuver.  On rejection (or a CRL “Complete Response Letter”) the stock will certainly plummet, and any gains and initial investment will be lost.  On the other hand, if the FDA approves the drug the stock price will rise. However often this causes a sell-off as traders quickly take their profits.  Within a day or so the stock price will often close well below the peaks of the anticipatory run-up.

Analyzing these I have found that the most profit can be gained by selling the stock before the actual catalyst.  What determines when to sell?  That is the tricky part, as these stocks are often erratic.  It is important to set target goals and not get greedy.

Examples

Here are some recent examples of run-up plays and their prices leading up to their catalyst date:

POZN- FDA date for PDUFA (Trexime)
PPS 4 months out- $5.93
PPS 3 months out- $5.88
PPS 2 months out- $6.14
PPS 1 month out-  $9.55
Run-up peak: $11.66

SPPI- FDA date for PDUFA (Zevalin)
PPS 4 months out- $1.43
PPS 3 months out- $1.78
PPS 2 months out- $2.50
PPS Sell Date- $6.68

SVNT- FDA date for PDUFA (Krystexxa)
PPS 4 months out- $4.94
PPS 3 months out- $5.28
PPS 2 months out- $6.78
PPS Sell Date- $15.63

These are just 3 examples that show the potential profits of the run-up method.  See other recent stock and do your research.  Take a look at these: CTIC, NEPH, BDSI, SOMX, ISTA, DDSS, etc.

Personal Notes
1.) Do your best to not get greedy. No matter what the hype, sell all your shares before the FDA date. In most of the cases the vast majority of money is made in the run-up, not the approval. Lately stocks have even dropped after FDA approval.

2.) When selecting a stock to buy 4 months away from FDA approval there are multiple factors to consider, and every stock is unique. The smaller the company (the lower the share price) the more likely it is that the stock price will double, triple, or more.

3.) Maximum return on investment is with stocks with a beginning share price of under $10. In fact the lower the better, under $1 is a great start.

4.) Examine the type of catalyst.  Best returns are usually found on stocks with PDUFA (Prescription Drug User Fee Act) FDA dates. However other profitable catalysts include FDA medical device approval (510k), FDA Panel Reviews, Clinical Trial Results, and Medical Conference Presentations.

See my website at http://www.BioRunUp.com for more trading information and daily updates to the free, no registration, FDA calendar.  Make sure to sign up for the spam-free email updates through Google's FeedBurner. Enjoy.



Disclosure: No positions