The inherent volatility of biotech shares makes biotech investing among the most lucrative ways to invest in the stock market. At the same time, that volatility also makes it one of the most dangerous.

Often, biotech stocks are powered by sector- and stock-specific factors unrelated to the overall economy. Price drivers like FDA approvals, drug sales, product announcements, test results, and even government regulations are the catalysts behind biotech share prices. 

#-ad_banner-#However, this volatility serves me well, because I love buying weakness in the stock market. 

Not just any weakness, but a weakness that is tied to a short-term situation rather than an inherent flaw in the company. 

When a short-term negative situation is combined with the inherent volatility of a biotech company on the cutting edge of its market, I see an opportunity…

Ophthotech (Nasdaq: OPHT) fits the above description to a tee. Let’s take a closer look.

Ophthotech describes itself as a biopharmaceutical company focusing on the development of novel therapeutics to manage diseases of the rear of the eye. They specialize in developing creative therapies for age-related macular degeneration (AMD). 

The company’s most promising product candidate, Fovista anti-platelet-derived growth factor (anti-PDGF) therapy, is in Phase 3 clinical trials for use in combination with anti-vascular endothelial growth factor (anti-VEGF) therapy. This treatment reflects the current state-of-the-art for the handling of wet AMD (a more advanced type of AMD).

Shares of the $1.3 billion-market-cap company have been crushed this year, trading down by over 60%. 

In September, competing biotech giant Regeneron (Nasdaq: REGN) posted results of its phase 2 CAPELLA study. The study was looking at essentially the same therapy that Ophthotech has been developing: testing an anti-VEGF therapy (Eylea) in partnership with rinucumab, an anti-PDGF receptor beta antibody. The trial attempted to reveal how much better the combination Eylea/ rinucumab treatment functioned versus using Eylea by itself, in patients who suffer from neovascular AMD.

However, REGN bulls were crushed when the 3-month test indicated that the combination therapy performed worse than just using Eylea by itself.

This failure also affected Ophthotech shares as investors began to worry that Fovista may be a similarly ineffective treatment. 

The bullish position was that rinucumab was slated as being Fovista’s major competitor. Now, with rinucmab knocked back, investors are waiting to see if Fovista can report positive data from its Phase 3 clinical trial in combination with Lucentis, developed by Novartis (NYSE: NVS). Results are expected to be announced in the fourth quarter 

But there is hope that this trial will fare better than Regeneron’s did. In Fovista’s phase 2 study, the combination treatment showed a 62% improvement versus using Lucentis alone. 
Should Fovista be approved for the market, Ophthotech will have a huge, long-term advantage in the market. 

And the market is starting to take notice: financial research firm BTIG just reaffirmed its buy rating on the shares. Analyst Ling Wang commented: “The long-awaited Phase IIb trial of Fovista in combination with Lucentis was published online today in Ophthalmology, the journal of the American Academy of Ophthalmology. We believe the publication in a highly regarded peer-reviewed journal underscores the robustness of the Phase IIb data package. The publication has raised no concerns concerning the two recent bearish arguments: 1) Imbalance in baseline lesion size could have driven the overall Phase IIb success in VA improvement, and 2) Anatomic analysis in Phase IIb does not support VA improvement, which is a positive, in our view. Additionally, the publication proposed multiple mechanisms of action of Fovista (consistent with our view), supportive of our disagreement of read-through from Regeneron’s (REGN, Neutral, Analyst: Dane Leone) recent Phase II failure.“

Risks To Consider: Any way you slice it, biotech investing is risky. In Ophthotech’s case, much is riding on the phase 3 results. Despite promising early results, it is impossible to forecast what will occur. There is no way to predict any bearish happenings that could continue to drive the shares lower. Always use stops and only use risk capital when investing in biotech stocks. It is best to err on the side of caution when it comes to this volatile sector. 

Action To Take: I love this company at the current price level and firmly think the high risk is worthwhile. 

Any solidly bullish news could easily double or even triple the share price. Buy now in the $34.50 per share zone with first stops at $27.33 per share and a target of $95.00 per share for an excellent risk-reward ratio. 

Editor’s Note: My colleague Genia Turanova is always looking for outperforming stocks for her Game-Changing Stocks premium advisory. Recently she reported on a new epidemic that is surfacing in hospitals. This epidemic is killing 441,000 Americans a year — more than strokes, Alzheimer’s, and diabetes combined. Get the full story here…