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Biotech Investing Vocabulary

Ernie Tremblay is the Director of Scientific Research here at Money Map Press. He's leveraged his 25+ years of experience as an acclaimed medical researcher into a proprietary Three-Phase System that lets him identify the next "blockbuster" drugs – the ones that will cause a biotech stock to double or triple overnight. To learn more about his Biotech Insider Alert research service, call our VIP Customer Service Team at 1-855-509-6600.

Absolute risk. The change in risk associated with a new treatment, as compared to placebo or another drug.

Action date. The day on which the FDA will determine whether to approve a new drug for marketing in the U.S. (interchangeable with "PDUFA date").

AdCom (Advisory Committee). Refers to a pre-approval review of a new drug by one of the FDA’s 50 expert advisory committees. On an assigned date, the panel considers all submitted evidence for safety and efficacy and then makes a recommendation to the FDA – which the agency is then free to follow or not, but does follow 80% of the time, on average. The panel may include lay advocates. Usually a significant catalyst for stock price movement.

ANDA (Abbreviated New Drug Application). An application that must be submitted for the approval of a generic drug. The evidentiary requirements are somewhat more lax than those for an NDA (New Drug Application), which is required when submitting a new and original drug for approval.

Blinded study. A medical study in which the researchers don’t know which patients are getting which treatment.

Case control study. An observational study that compares patients who have a disease with patients who don’t (control group), in order to determine the relationship between a particular risk factor and the disease.

CDER: Center for Drug Evaluation and Research at the FDA. Responsible for review and approval of new drugs, medical devices, procedures, and therapies.

Clinical significance. This refers to the practical advantage a new drug or device has over the current standard of care (distinct from "statistical significance"). For example, you may be able to show that a new asthma drug has a real (statistically significant) effect in relieving symptoms more quickly than current medications. But if the current drugs relieve symptoms within one minute, and the new drug does the same thing in 58 seconds, the improvement may be real, but the difference may not be important – that is, it has little clinical significance. On the other hand, an experimental drug may appear to work no more frequently than placebo in improving symptoms, but if the control group is reporting they feel a little better while still lying in bed, and the treatment group is up and playing tennis, the statistical significance may be low, while the clinical significance is high.

Clinical trial. A medical study of the efficacy and safety of a new drug, device, treatment, or procedure, using human subjects. They usually take place in three phases, although some go through four, and a few are approved before completion of Phase 3 studies. There may be more than one study done in any phase. The following definitions are from The U.S. Library of Medicine:

  • Phase 1: Researchers test a new drug or treatment in a small group of people for the first time to evaluate its safety, determine a safe dosage range, and identify side effects. I never recommend investing because of Phase 1 results, because they give no information about the therapy’s effectiveness.
  • Phase 2: The drug or treatment is given to a larger group of people to see if it is effective and to further evaluate its safety.
  • Phase 3: The drug or treatment is given to large groups of people to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that will allow the drug or treatment to be used safely.
  • Phase 4: Studies are done after the drug or treatment has been marketed to gather information on the drug’s effect in various populations and any side effects associated with long-term use.

CMC: Chemistry and manufacturing controls. The FDA will evaluate a manufacturer’s facilities and ability to produce a product meeting these strict standards before it approves the product for marketing.

Cohort study. An observational study that follows one or more groups of people over time. When researchers recognize or recruit and organize a group and then follow it over time, it is called a prospective study. If researchers look back at a group that formed in the past and study its subsequent historical behavior, it’s called a retrospective study.

Confidence interval. A statistical term referring to a range of values within which the answer you’re looking for is most likely to fall. It has two parts: estimate and margin of error. So let’s say a study looks at a small sample population and finds that at any given time, an average (arithmetic mean) of 30% of people in that population will have a mosquito bite on one ear. That’s the estimate. The real number for any given time, however, may be a little higher or lower, so probability calculations are used to determine what the range of deviation (margin of error) might be. The estimate will look something like this: .30 ± .05. That tells you researchers have some confidence that the real number lies between 25% and 35% (.25 and .35). Just how certain they are, however, is expressed by another percentage called the confidence level. A 95% percent confidence level for the interval above (.30 ± .05) means we are confident further polling will yield a number within that range 95 out of 100 times.

Control arm. Researchers conducting a study on a new drug will often divide the participating subjects into groups, for comparison purposes. One of these groups will provide the basis for comparison. This is called the control arm. It is the group that does not receive the new drug or treatment. The other group(s) is called the treatment arm, and it does receive the new drug treatment.

Correlation. Although two biological events may often or always occur together, it doesn’t necessarily mean that one causes the other. For example, a high concentration of a protein called beta amyloid in the brain is associated with a diagnosis of Alzheimer’s disease, but that doesn’t necessarily mean it causes the disease. It may, instead, be a symptom. Or it may be that Alzheimer’s and beta amyloid both occur in the same individuals but are functionally unrelated. In any of these cases, we can say the high protein concentration correlates with (or is a marker for) the disease.

Data release. The various clinical trials of a new experimental drug yield valuable data that demonstrate its value and safety. Typically, drug developers will present these data at medical conferences, often in the form of a poster presentation. If the data is positive, it can be a powerful catalyst in boosting a company’s stock value. If negative, the opposite happens.

Developmental drug. This refers to any drug that has not yet received FDA approval for marketing. Also called "investigational drug" or "experimental drug."

Double blinded, randomized trial. This is a study in which subjects are randomly assigned to either a control group or treatment group, and neither the researchers nor the subjects know who is in which.

EMA: European Medicines Agency. The European equivalent of the FDA.

Endpoints. These are the outcomes researchers are hoping to achieve in a study. Here are the three most common types:

  • Primary or "direct" endpoints are the most important. These must be clinically meaningful,that is, they must show improvement in survival, or in the way the patient feels or functions. These are the outcomes the FDA uses in judging a study successful or unsuccessful.
  • Secondary endpoints are additional events of interest, but they must be viewed with caution, as the studies in which they appear are not designed to assess them.
  • Surrogate endpoints are laboratory measures or physical signs intended to be used as a substitute for a clinically meaningful endpoint and to predict positive outcomes. For example, improved cholesterol levels have been used in place of actual long-term survival data in assessing drugs that treat atherosclerosis. The FDA will allow use of a surrogate endpoint only if it’s well validated to have a strong relationship to a primary endpoint, or to assess a drug that has "accelerated approval" status.

Equivalence. Two therapies that are identical or nearly identical in their primary treatment outcomes.

FDA (Food & Drug Administration). The government agency that, among its other responsibilities, controls the marketing of pharmaceuticals in the U.S.

GAIN Act. A 2012 act of Congress that incentivizes new antibiotic discovery by granting five-year market exclusivity.

Hatch-Waxman Act. Formally Drug Price Competition and Patent Term Restoration Act of 1984. This amendment to the Food, Drug, and Cosmetic Act permits generic versions of previously approved innovator drugs to be approved without submission of a full new drug application (NDA). An ANDA (Abbreviated New Drug Application) refers to the previously approved NDA (the "listed drug") and relies on the Agency’s finding of safety and effectiveness for the listed drug product.

Investigational Device Exemption (IDE). Under this exemption, investigational devices are allowed to be used in clinical studies to gather safety and efficacy data for pre-market approval (PMA).

Label extension. This refers to additional uses a drug may be put to after it has been approved for its original indication. The FDA must approve all label extensions. This is not one of our regular "calendar catalysts," but a label extension can expand a drug’s market significantly and give the company’s share price a nice pop.

Licensing agreement. An agreement between two companies for one to market the other’s product. This happens often in the bioscience sector, as many start-up biotechs don’t have the capital or know-how to set up a marketing structure, either here or abroad.

Marketing Authorization Application (MAA). This is the European Medicines Agency equivalent of the FDA’s New Drug Application (NDA). This application must be submitted when requesting marketing approval for a new drug in Europe.

Murine study: Any preclinical medical study done using rodents as subjects.

NCE: New Chemical Entity. This is an FDA designation for an "active moiety," meaning active ingredient, that has never before been approved the Agency. The designation can give a new drug extended market exclusivity, apart from (but not in addition to) that associated with patents.

NDA: New Drug Application. After completing Phase 3 trials on an experimental drug, its manufacturer must submit this application to the FDA to secure a final review for approval. The application includes all relevant data from both clinical and preclinical trials, proposed labeling information, marketing plans, and details about how and where the drug will be manufactured.

NNT: Number Needed to Treat. This is an important number in assessing the clinical significance of a new drug. If the number needed to treat is four, it means that on average one in four patients will respond positively to a drug; that is, you must treat four patients in order to get a positive result from one.

Non-inferiority. This is a standard of proof in a clinical trial. It means that a drug doesn’t have to prove it is superior to the current standard of care, but only that it’s as good – or nearly as good (i.e., within a stated percentage).

Open label trial. This a clinical study in which everyone receives an experimental education. There is no control group. This is often done to make a new medication available to individuals who participated in Phase 3 trials and benefitted from the drug.

Orphan disease. Any illness affecting fewer than 200,000 individuals in the U.S.

Orphan drug. A designation that the FDA grants (through the authority of the 1983 Orphan Drug Act) to drugs that treat orphan diseases. I like investing in these drugs for four reasons: 1) They’re often first-in-class, meaning they’re often the only drug that treats a given condition; 2) You can charge a whole lot for them – $250,000 per year is not unusual; 3) They only need to penetrate a small, easily identified and accessed market. If you’re treating a lung condition, for example, you need only reach pulmonologists (lung doctors); and 4) Orphan drugs are eligible for extended market exclusivity and patent protection (seven years), as well as special tax incentives and clinical research subsidies.

P value: Number that tells you whether the results of a scientific study has reached the threshold of statistical significance. Although this can change from study to study, generally researchers look for a P value of <.05, meaning that there probably less than a 5% chance that the results are due to chance.

PDUFA (Prescription Drug User Fee Act) date. This is the date on or by which CDER will determine whether or not to approve a new drug for marketing in the U.S.

Pipeline. A catch-all term to describe the set of experimental drug candidates that a company has under development.

Placebo. An inactive substance or drug used in the control arms of medical trials. Also known as a "sugar pill."

PMDA. Pharmaceutical and Medical Devices Agency. Japan’s equivalent of the U.S. FDA.

Pre-clinical trials. These are studies done either done using laboratory equipment (in vitro), computers, or animals. It generally takes six to eight years for a new drug candidate to go from the discovery stage to the clinical trial stage.

Prospective study. Observational cohort study over time of a newly formed group.

Randomization. The random assignment of patients to various study groups in a clinical trial in order to prevent a biased result.

Relative risk. The risk of a medical event occurring in a group of treated patients vs a group of untreated patients. More formally, it’s the ratio of the probability that an event will occur. So if 10% of sun worshipers get skin cancer for every 1% of non-sun worshipers, the relative risk for sun worshipers would be 10 (to 1).

Retrospective study. Study of a cohort that formed in the past and what happened to it over time.

Unblinded study. A study in which participants and researchers know who is getting a medication and who is getting placebo. Researchers will often unblind a study when the positive results of an experimental therapy are so obvious and powerful that it would be unethical and immoral not to make the treatment available to sick patients in the control group.

Trading Terms

Bollinger Bands. Upper and lower values of share price over time, based on a simple moving average. Used to measure price volatility. When a share price repeatedly touches the upper band, a stock is often considered to be over-bought. Conversely, when it repeatedly touches the lower band, it is considered over-sold. (Bollinger Bands were named after their creator, technical trader John Bollinger.)

Burn rate. Negative cash flow. This is probably the most important financial indicator for a young biotech that is not yet selling products. It’s basically the sum of operating expenses plus negative cash flow from operating activities. You can find these numbers, per quarter, on Yahoo! Finance. Divide the quarterly number by three to get monthly burn. If a company looks like it will run out of money within a year, given its current burn rate, then it will have to raise money, often through dilutive tactics like offering a block of public shares.

Dividend. A distribution back to shareholders of a portion of a company’s earnings, paid through cash or stock. Often expressed as a percentage of share price (called "yield"). Bioscience stocks rarely pay regular dividends, because they reinvest those profits into the business for research or to kick up growth.

Float. The total number of shares available for buying or selling on the market.

Long position. Buying a security that you expect to increase in value over the long term. This is almost exclusively our trading strategy in Biotech Insider Alert.

Lowball order. An offer to purchase a security lower than where it’s currently trading. This sets you up to buy automatically when it drops to a certain price, either because of a bearish market trend or a sudden drop in the stock. I like entering lowball orders ahead of time to get into a stock we want to own at a bargain-basement price.

Market capitalization. This is the total value of a public company’s outstanding shares. We’ll be targeting small- and mid-cap companies that can really see a pop in share price based on positive results, recommendations, or approval. A market cap of $250 million to $2.5 billion is the "sweet spot" for growth in the bioscience sector. Less than $250 million can mean low volume trading, which can be a problem if you need to sell. More than $2.5 billion makes a company less responsive to catalysts – a single bit of news will barely budge the stock price.

Moving average. A technical indicator based on past prices (often past 50 days). Helps you spot trends in the share price.

Option. A financial derivative on a security. It’s a contract between two parties that gives the buyer the right (but not the obligation) to purchase a security from the seller at an agreed-upon price and date. Options can be used for risk management or be very speculative. We’ll almost never use options in Biotech Insider Alert, because they are too time-sensitive to be safe or effective.

Public offering. A block of securities made available for purchase to the public, usually at a predetermined price. A public offering from a biotech usually means a dilution of share value, often on a temporary basis.

SG&A: Selling, General, and Administrative expenses.

Short position. Buying a security you believe will decrease in value over the short term. The technique is to borrow shares from another investor or broker, sell them at a high price, then buy them back when the price is lower. The shares are returned to the original owner, and the short seller pockets the difference in price. We won’t be using this strategy often in Biotech Insider Alert, but it’s a powerful one to have in your back pocket.

Support. A price level a stock will not likely go below, given its historical behavior. This is the price level at which a majority of investors entered the stock. If the stock goes below this price, the support is wiped out, and a panic of selling may follow. It’s useful to keep an eye on support levels to formulate your trading strategy on a particular bioscience stock.

Trailing stop. An order to your broker to sell a stock automatically if its price falls to a predetermined percentage below its highest value since the stock was purchased. Since the bioscience sector is more volatile than most, I will usually recommend using a 35% trailing stop on our positions. That way we protect our profits while still limiting our downside and keeping our upside (which is theoretically infinite) intact.

Volume. The number of shares traded on a stock at any given time. I only target stocks with significant liquidity to let you trade in and out easily.