Are Biotech Penny Stocks Worth Investing In?

By Duncan Ferris

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What can biotech penny stocks do for you? While investors might be attracted by the potential for outsize returns, there are serious risks to consider before throwing weight behind these cheap stocks.

Photo by Ashraful Islam on Unsplash

Biotech penny stocks can be an exciting prospect for investors, yielding potentially massive returns. But with a high level of both complexity and volatility to contend with, are biotech penny stocks worth investing in?

Why is Biotech Attractive for Investors?

The first thing that makes biotech attractive is the fact that investors have the potential to fund treatments that can be life changing to people across the globe. Who doesn’t like to feel good about the way they use their money?

For example, the successful creation of human organs in laboratories could lead to major improvements in organ transplantation, extending the lifespans and quality of life for sufferers of all manner of medical conditions.

Next is the anticipated explosive growth of the biotech segment. According to Statista, global sales of biotech drugs are anticipated to have increased from $149bn in 2012 to $420bn in 2022. Many excited investors anticipate that this growth will continue over the coming years.

Finally, there is simply the fact that biotech stocks already have the potential to offer enormous returns to investors.

But what do these sizeable returns look like in practice?

For more info, Click Here to find out how biopharma could boost your portfolio!

Axsome Therapeutics Case Study

Investing in the right biotech penny stock can result in enormous returns. For example, Axsome Therapeutics (NASDAQ: AXSM) is a former penny stock that has shot for the stars since January 2019.

In that time, the business’ share price has rocketed from just over $2 to $56.82 today. In fact, the stock reached a high point of over $100 in late 2019, with its share price growing around 50 times larger in this period.

But what precipitated this massive upswing in share price?

The business’ transformational year began in early January with the news that AXS-05, a treatment candidate for major depressive disorder and other central nervous system disorders, met its primary endpoint and significantly improved symptoms of depression in a Phase 2 clinical trial.

This boosted the company’s share price above $4, but further explosive growth was yet to come in December.

This month saw the stock price reach its aforementioned high of more than $100 after the company reported that AXS-05 met the primary endpoint and rapidly and significantly improved symptoms of depression in a Phase 3 trial in major depressive disorder.

The positive result here, in a trial representing one of the final hurdles the treatment needed to negotiate prior to receiving approval for commercialization, is a textbook example of the kind of catalyst that can send biotech stock prices shooting higher.

But not every biotech penny stock encounters this type of success.

Considering Biotech investment? Check out our analysis of Purple Biotech and Legend Biotech!

Biotech Penny Stocks Risks

Of course, biotech stocks like AXSM are very much a best-case scenario, as there are a host of risks to investing in penny stocks in this sector. Additionally, the normal penny stock risks will also apply to Biotech penny stocks.

The vast majority of biotech penny stocks are going to be at the clinical or pre-clinical stage of development. That means their treatment candidates are still undergoing the testing required to receive approval from regulatory authorities and become available for commercial sale.

As such, these companies normally cannot rely on revenue alone to pay the bills, instead operating using capital from sources like investment, loans or grants. These sources of funding can dry up before revenues have grown to a sufficient size though, leaving businesses unable to afford to keep operating.

This might even happen before a company has made any revenue whatsoever.

Additionally, funding is particularly hard to come by at present, with high interest rates making borrowing more difficult.

Finally, revenues might not be as great as anticipated when a treatment candidate finally gains approval. The product might not perform to a satisfactory level, might see its impact marginalized by competition or might even be the victim of a poorly executed sales strategy.   

Are Biotech Penny Stocks Worth Investing In?

As with all investing decisions, there are risks involved with backing biotech penny stocks. These are high-risk investments, so investors should not count on any returns.

One strategy to mitigate this risk is diversification. Investors might want to invest in a range of different biotech stocks rather than putting all their eggs in one basket, so to speak.

Additionally, due to their high potential for volatility, biotech penny stocks might be more suited to investors who plan on actively managing their portfolios.

Finally, this is a sector where it is key for investors to do their research so that they fully understand what they are investing in. As with the wider healthcare and pharmaceutical sector, biotech is full of jargon and complex terminology.

If you’re wanting to invest in the space, taking the time to battle through this and gain a deep understanding of what a company actually does will give you an edge in understanding its prospects, competition and potential risks.

All told, biotech stocks are a risky investment and the investors best placed to make money from the space will have relevant scientific expertise and the motivation to actively manage their investments.

For biotech stock inspiration check out our deep dives into Brickell Biotech and Regen BioPharma!

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In this article:

Topics:
Biotechnology
Pharmaceuticals
Industries:
Healthcare
Companies:
Axsome Therapeutics

Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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