Question

Your friend Boris makes the following statement:
‘I’m buying shares in a biotech company. They recently announced third stage FDA trials on a new Alzheimer drug, and it’s got the potential to turn into a huge market.’
What facts need to be true for your friend’s rationale to be correct?

Answer 1

The information is given about the start of the third phase trial for the Alzheimer drug, which is one of the most crucial stage in the drug approval route as it involves testing the drug in a large population, which could involve many years (7-15 years) for the result to show. Moving to 3rd stage is definitely a positive sign, however, there are other parameters both qualitative and quantitative measures that could be looked at. The past patents and Ip's already existing for the company. The rate of success in past applications and the process of the approval routes. Evaluating the quality of management of the company.

Coming on the financial numbers, parameters such as cash & equivalent for short and long term obligations, the capital structure especially the debt component, P/E, PEG etc are few things which would be definitely checked first hand to check the potential for huge markets.

Kindly check the reference which will give good knowledge about pharma stocks in general:-

https://www.fool.com/investing/how-to-invest-in-pharmaceutical-stocks.aspx