by Marc Lichtenfeld
Senior Analyst & Healthcare Specialist, Smart Profits Report
Editor Xcelerated Profits Report

As you may know by now, the healthcare sector is my bread and butter when it comes to investing.

Over the years of covering healthcare stocks, I’ve discovered that there are many ways to make money. On one hand, large-cap pharmaceutical stocks have the ability to provide a steady dividend, while still achieving capital appreciation. On the other hand, small-caps offer potentially explosive returns, but contain more risk.

Today, we’re going to take a look at how to invest in small-cap names that typically don’t have many (or any) drugs on the market, but offer the highest potential growth.

When To Invest In A Small-Cap Biotech?

Some investors (those who can accept more risk) like to invest in a company when it’s in the earliest stages of a drug’s research and then get out fairly quickly.

Others like to pare their risk by entering in the later stages of drug development, banking on Food & Drug Administration (FDA) approval, or the applicable regulatory approval in other countries.

Then there are investors who wait until the drug is approved, preferring to invest in a company that operates like a real business with actual sales, rather than one that still has product in development.

However you choose to invest in biotech, you can make huge profits if you know where to look. So let’s take a look at the three main stages when you can invest…

The Three Stages Of Potential Biotech Stock Investment

Early Stage:

Investors can get excited at the promise of a new drug, even before there is any proof that it works. The mere concept of a new therapy to defeat cancer or battle diabetes can attract investor dollars before the drug even enters the clinic (human trials).

Even in Phase I trials, where a small study of a few dozen healthy volunteers is used to better understand how the drug works inside the human body, investors may feel the potential reward is so high that the considerable risk is worth taking.

Investors who put their money into a company that has drugs in early development usually stand to profit the most. At this point, the stock price is typically low, as the company hasn’t yet shown that it has a sustainable business, or that its drugs are safe and effective.

Mid-Stage:

If a drug succeeds with Phase I clinical trials, it moves onto Phase II. This usually comprises testing on several dozen patients who have the targeted disease. Researchers aim to prove that the drug is safe and effective in this limited patient population.

As for investors who join in after Phase II data is released, they have some comfort in knowing that the drug has passed its first real test. However, plenty of drugs have done well in Phase II and for various reasons failed in Phase III.

Sometimes, this has to do with the small number of patients tested in Phase II.  Other times it concerns the design trial.  What you’d ideally like to see in a Phase II trial is one that is “double-blinded” and “placebo controlled.” These are studies in which patients, doctors, and the company do not know who is receiving the new drug and who is receiving placebo (or the current standard therapy).

Phase III trials, which involve hundreds or thousands of patients, are usually conducted this way. So by running Phase II in the same fashion, investors can feel more confident that the drug will have similar results in the later stage trial.

If the drug is successful in Phase II trials – the first indication that it actually works against the targeted disease – the stock will often spike. This is when many early investors head for the exits, taking their profits and avoiding the risk of a failed Phase III, which happens quite often.

Should the post Phase II spike occur, it’s a good idea to take some profits off the table – even if you’re in the position for the long-term.

Late Stage:

As just noted, just because a drug reaches Phase III, it doesn’t necessarily mean it’s a slam-dunk for full approval. Many drugs, even those that have positive data in Phase III, do not get approved.

There are numerous reasons why the FDA can put the kibosh on a drug: Safety concerns, manufacturing issues, trial design, or just not being convinced of efficacy, are all reasons that regulatory agencies will continue to reject drugs.
Investors who get involved with a biotech stock after Phase III data is released, but before official approval, can benefit greatly once the drug gets the green light to go to market.

But without doubt, the easiest and safest time to invest in a small-cap biotech is after the drug receives approval.  However, those investors will obviously not have the same return as those who were willing to take on more risk.

For investors who can afford to stick with the drug approval process, the profits can be life-altering when the drug gets approved and eventually goes on to be a big seller.

For example, investors who sunk $10,000 into Celgene (Nasdaq: CELG) 10 years ago have over $1.4 million today.

So how do you grab a piece of the pie?

The Next Celgene?

This is one stock that I am extremely excited about.

So much so, in fact, that I just released an in-depth report on it in my small-cap healthcare investing service, Access.

It’s a late-stage company that I believe is poised to be the next Celgene – the stock that turned investors’ $10,000 into over $1.4 million.

The opportunity is immense. The company is just wrapping up Phase III trials for a cancer treatment that currently has no approved drugs to treat it. Needless to say, if this tiny company is successful, it will have the market to itself.

Even The FDA Wants This One On The Market

What I especially like is the rigorous way that the company designed its Phase II trial, where it ran a randomized double-blind placebo controlled trial. This is not something you see too often in oncology.

Not only that, the results showed that the progression free survival (PFS) rate of all patients taking the drug doubled.  A subset of patients saw their PFS rate quadruple.

This increases my confidence that Phase III will confirm the effectiveness of the drug. Even the FDA wants this drug on the market (assuming it’s safe and effective, of course). The agency has fast-tracked it and granted it “orphan drug status.” This means it will speed up the approval process because of the dire need for the drug and the company will get seven extra years of patent protection.

And to top it all off, the market for this drug is three times the size of Celgene’s. So you can see why I’m so excited about this recommendation.

Here’s How To Invest In This Company

Time is of the essence here. This week, the company is kicking off its road show to institutional investors and getting the story out to the masses. This will surely attract interest. Once institutions get on board, the stock is going to move beyond our recommended price.

Additionally, we’re holding an exclusive, private conference call for Access subscribers, featuring the company’s CEO and a cancer expert. It takes place on Wednesday, September 10 at 2:00 p.m. ET. But in order to be eligible to participate in the call, you must be signed up by midnight on September 6.

For information on Access and this incredible opportunity, please click here.

Best regards,

Marc Lichtenfeld