Why-Momentum Biotechnology stocks can lose a lot of money.

The thing about biotechnology stocks is that they are risky—very risky. Money can be lost in the stock market at a frenetic speed.

Because biotechnology stocks are 100% risk-capital securities, they should only be relegated to the “play money” portion of a stock market portfolio.

But a winner in this group can produce major capital gains because of the massive participation among institutional investors, the profit incentive, and the life-changing medicines that are worth so much money.

One company I’ve written about consistently is Alexion Pharmaceuticals, Inc. (NASDAQ/ALXN), which is a powerhouse wealth creator on the stock market.

It’s more than a 10-bagger, and it only sells one approved drug. The stock is in recovery mode after its earnings results confirmed it’s still on the growth path.

Alexion’s 10-year stock chart is below:

Chart courtesy of www.StockCharts.com

The stock market chases biotechnology stocks, and it’s a group where momentum traders can do well with strong risk management.

Previously, I wrote about Endocyte, Inc. (NASDAQ/ECYT), which is one of those developing biotechnology stocks that’s executing perfectly. (See “High Risk, High Reward—Two Great Companies for Traders.”)

Endocyte is working on cancer therapies, and the company made the decision to collaborate with Merck & Co., Inc. (NYSE/MRK)—a smart move.

The company is developing its therapeutic candidate vintafolide (“EC145”), which is in Phase III clinical trials for the treatment of platinum-resistant ovarian cancer.

For $120 million up front, Merck bought the exclusive global rights to EC145; and if it is successful, Endocyte is eligible for milestone payments up to $880 million.

The way Endocyte is developing as a drug discovery company is exactly the way to go, and it’s a shining example for all biotechnology stocks. Endocyte’s stock chart is featured below:


Chart courtesy of www.StockCharts.com

Biotechnology stocks continue to be one of the stock market’s hottest areas. The NASDAQ Biotechnology Index has been on a tear over the last three years. Continued momentum is greater than 50/50.

I admire what a company like Endocyte has done, recognizing that it’s proprietary science has a lot of potential. By selling to Merck, it legitimizes all of the company’s proprietary technologies. Collaboration with a well-heeled pharmaceutical giant is a vote of confidence.

It’s worth saying again that biotechnology stocks are 100% risk-capital equity securities.

I approach the sector from a business perspective, basically expecting to lose money on the stock market with tight stops, until I land a winner. Then there’s a whole other set of problems.

Biotechnology stocks have less correlation to the action in the rest of the stock market. But there is one more thing.

In the entire stock market, one of the best winners since 2010 has been Biogen Idec Inc. (NASDAQ/BIIB), or “the BIIB.”

Multiple sclerosis (MS) is often referred to as an “orphan” disease, meaning it’s a rare, debilitating disease with very few treatments. However, Biogen Idec created a treatment for MS, and while it’s nowhere near a solution, it is helping.

In order for pharmaceuticals to be created, the profit incentive must exist. With this in mind, nobody ever went wrong trying to be in the business of helping people.