Biotech investing is like the Wild West: Anything can -- and does -- happen.
Inexpensive stocks in this sector can shoot higher on signals of positive test results. By the same token, top-performing biotech shares can plummet when a flagship product fails to gain regulatory approval or is forced into irrelevancy by a competitor.
Even companies that appear to be up-and-coming industry leaders can quickly fade into has-been status on news of a minor negative occurrence. In other words, while the biotech investing arena can sometimes offer rapid returns, it is only for investors who can stomach risk.
One tactic used by the most successful investors in this arena is to spread risk across multiple stocks. This tactic relies on speculating that one or more will be a huge winner, creating profits for the portfolio despite the almost guaranteed losers.
The latest biotech company catching my attention is Exact Sciences (EXAS). This Wisconsin-based company has developed a colorectal cancer-screening tool that is showing promise. Colorectal cancer is the third most commonly diagnosed cancer and the third most deadly, according to the U.S. Cancer Society.
Fortunately, it is also the most preventable due to screening and its relatively slow-growth characteristics. This type of cancer generally starts out as non-cancerous polyps on the walls of the colon and rectum, which have the potential of turning into cancer.
While this cancer can often be prevented, many people avoid being tested because it involves an uncomfortable colonoscopy procedure.
But Exact Science is looking to change that with its newest testing procedure that, if approved, could send shares soaring.
The company has recently conducted the DeeP-C trial of its game-changing proprietary DNA stool test called Cologuard. This is a patented, non-invasive cancer-screening method.
Exact Science first struggled when it failed to develop a commercially practical and medically persuasive test in the mid-2000s. This difficulty resulted in the board of directors wisely appointing Kevin Conroy as CEO, who focused on getting the test to market and reshuffling operations. However, his most critical accomplishment was to recruit Dr. David Ahlquist, who was responsible for many of the methylation markers used in Exact's cancer test.
The DeeP-C test demonstrated 92% sensitivity in the detection of colorectal cancer. The test consisted of a 10,000-patient trial and revealed a 42% sensitivity for the detection of pre-cancerous polyps, including a 66% sensitivity equal to polyps 2 centimeters or larger.
On June 10, the company submitted the final module of the pre-market approval application and DeeP-C study data to the Food and Drug Administration. Exact Science also plans to submit the results for publication in a peer-reviewed journal and a possible presentation at a major medical conference.
Shares have been in an uptrend since mid-April. Due to misinformation regarding the DeeP-C test results, shares plunged 30% to around $7 in the premarket on the day of the release. The stock price quickly began to follow this decline with an uptrend by the end of the trading session.
The most recent price-altering event was the issuing of nearly $64 million of shares on June 18. Shares dropped in the days leading up to the issuing date but have resumed their uptrend, pushing against $14.
Risks to Consider: Biotech investing is marked by both high rewards and high risk. The best way to deal with the risk is to spread your investment across multiple stocks. Regardless of how positive a particular biotech firm's prospects may appear, rapid change is the only constant in the field. Always use stops and position size properly when investing.
Action to Take --> I like Exact Sciences on a breakout close above $14. My 18-month target price is $21.
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