Here’s a little-known secret to picking winning biotech stocks

From Dave Lashmet, Editor, Stansberry Venture Technology:

This is the biggest mistake you may be making…

If you don’t invest in medicine… biotechnology… or drugmakers… you’re missing out on a massive part of the economy. Health care spending makes up more than one-sixth of the entire U.S. gross domestic product…

Many investors “buy biotech” by investing in one or two blue-chip Big Pharma companies like Pfizer (PFE). Or perhaps they buy an exchange-traded fund, like the iShares Nasdaq Biotechnology Fund (IBB), which holds a basket of about 150 biotech and specialty pharma companies.

Both choices can be incredibly profitable. As my colleague Steve Sjuggerud says, “If you catch just one biotech bull market in your lifetime, you may never have to work again.”

And in Stansberry’s Investment Advisory, we’ve recommended several of these safe, blue-chip Big Pharma companies – Porter wrote about Biogen (BIIB) in the Digest two weeks ago. It’s one of the companies recommended as a part of Porter’s “Future of Medicine” thesis.

But what if instead of buying the current large-cap winners or an index, you could simply buy the future winners?

By that, I mean the most promising 1% of small-cap biotechs…

This sounds impossible. But unlike any other sector, biotech companies show off their future products

Legally, this has to happen. Prospective drugs and medical devices are tested in clinical trials. And for the past decade, all the new trials that are starting are collected in one place, thanks to the U.S. Food and Drug Administration (FDA).

This clearinghouse of information for patients and investors is all hosted online, for free, at clinicaltrials.gov. You can search drugs, conditions, devices, and some 250,000 studies.

Of course, making sense of this flood of information isn’t easy. And the trials aren’t cheap.

That’s why today, half of all new drugs are from small companies…

Bean counters at Big Pharma got tired of paying the research costs for so many clinical-trial failures.

Instead, the new business model is to let investors take the risk… then Big Pharma steps in to buy the successes.

Fortunately, this means picking the right small firms can lead to huge gains when the takeover happens. Most small firms have no sales force, and Big Pharma companies have thousands of field reps. So there’s a virtuous economic payoff when the big companies and smaller firms get together.

The hard part that we specialize in at Stansberry Venture Technology is finding the successes before the Big Pharma sharks can beat us to it. We use three drug guidelines when recommending a company…

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Plus, we focus on Phase II trials. That’s when researchers have moved past animal testing for safety (Phase I trials) and into actually treating people with the disease. That’s our edge – our information advantage. We don’t have to wait for the final answer (usually found in Phase III trials)… We predict it.

I like to use a poker analogy…

Poker is a game of skill and chance where no player will ever have perfect information.

But imagine if you went to the World Series of Poker tournament and could peek at the cards of all of the players sitting around a table… plus you get to see the first three cards dealt (the “flop”). Now, the “turn” and “river” are yet to come… but you would have a huge informational advantage in knowing which player was likely to win the hand.

That’s how we treat investing in biotech companies after their Phase II results.

We know about five out of seven total cards… and can place our bet before the final two cards come out. (After Phase III trials, we’d know about six cards out of seven, with the final card being the approval from the FDA.)

And the thing is, if we don’t see a winning hand already in Phase II data, we don’t have to bet at all.

Here’s what that means for small-cap drugmakers…

Right now, there are about 10,000 Phase II trials running, and only 2,000 Phase III trials. This means that only one in five of the Phase II trials are successful. Plus, half of these are Big Pharma drugs.

In other words, small biotech companies see about 1,000 legitimate successes per year.

Our goal is to identify the companies behind at least 10 of these 1,000 successful drugs each year at Stansberry Venture Technology. And we want to do it in small enough companies where a successful drug and FDA approval will “move the needle.”

Let me give you a real-world example of successful Phase II clinical data – the Ibrance cancer pill from drug giant Pfizer. Long before this new drug was for sale, it was tested in breast-cancer patients. Here’s the Phase II data:

  • Of the 165 patients in the trial, half got chemotherapy and the other half got chemo plus Ibrance.
  • The Ibrance group had 20 months of progression-free survival – no hint of cancer for almost two years.
  •  The chemo group had progression-free survival of only 10 months.

So Ibrance was twice as good. That’s stellar Phase II trial results, and the FDA did not wait… Ibrance won FDA approval in 2015.

And in the confirming Phase III trial, Ibrance still gave people 10 months of progression-free survival. The numbers weren’t exactly the same – it was 14 months without the drug versus 24 months on Ibrance.

Still, you get the point. Positive Phase II trials can be highly predictive of later Phase III results. That’s why if we see stellar results early on, it’s possible to predict where the later winners will be.

In this case, Pfizer has made Ibrance a blockbuster drug, with sales approaching $1 billion per quarter. But for Pfizer investors, the numbers aren’t as good…

Pfizer is a behemoth with a $200 billion market cap. Shares have essentially gone nowhere since the company received approval for Ibrance.

That’s why we focus on small-cap companies in Stansberry Venture Technology, where successful trial results and eventual approval can mean gains of 100%… 200%… even 500%.

The silver lining with the Ibrance story…

One drug we are tracking in Stansberry Venture Technology works when Ibrance fails.

Cancer is a disease that starts with a mutation… And it keeps mutating, even around drugs. This means long-term survival for people taking Ibrance might not be much better than other chemotherapies.

Saving the patients that Ibrance treats, who then go on to fail with Ibrance… that’s a customer lost to Pfizer. It’s also a life lost. So as a matter of medicine and economics, it’s vital that we have these answers.

When we see Phase II data on this new drug, we can reasonably predict whether it will be a future blockbuster. Already, patients who reasonably would be dead are alive today because of this promising new compound.

That’s the first lesson to biotech investing – using positive Phase II trial results to find the top 1% of small stocks.

Regards,

Dave Lashmet
Seattle, Washington

Crux note: On Wednesday night, Dave will be joined by Dr. David “Doc” Eifrig to discuss a radical new cancer treatment that could help as many as 800,000 Americans per year.

This is going to be a huge story. It has the potential to change cancer medicine forever.

We’ll show you not only how to destroy many cancers that you or someone you love may one day face… but how to make a fortune on the company behind it all.

Click here to claim your seat for this event and reserve your free copy of Doc’s Living Cure e-book. This comprehensive book has detailed answers on what to do if you or someone you love receives a cancer diagnosis… where to go for treatment… and what you can do immediately to increase your chances of survival. And it’s yours to keep just for attending on Wednesday.

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