ZIOPHARM Oncology Inc. (ZIOP), Ariad Pharmaceuticals, Inc. (ARIA): 3 Reasons Investors Are Scared of Biotech Stocks

So how do you find the next Regeneron while avoiding companies like ZIOPHARM Oncology Inc. (NASDAQ:ZIOP), Navidea, Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA), and Affymax? A little skill and a little luck.

Binary decisions that look like they’re a shoo-in typically don’t result in big returns; investors have already factored in the approval or positive clinical trial and sell after the news is released. When the result is negative, like it was for ZIOPHARM, it’s even more costly.

Investing in less-than-sure-things is more risky, but it comes with much larger rewards. The trick is to find companies where other investors are discounting the risk more than is necessary, which allows you to buy with a margin of safety.

It’s hard to predict a drug getting pulled off the market like Omontys was. Instead, investors have to make sure the potential return from a company with a drug already on the market justifies the risk. A commercial-stage drugmaker really has to be a bargain to justify the risk, especially given the lackluster launches recently.

The article 3 Reasons Investors Are Scared of Biotech Stocks originally appeared on Fool.com.

Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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