The biotechnology ecosystem is vast and massively complicated. In the biotech world, CEOs have PhDs in chemistry and physics and market their products on the basis of their molecular uniqueness and ability to target or obstruct cellular structures. Broadly speaking, biotechnology is a subset of biology that focuses on utilizing living organisms to develop products. Today, these products tend to be pharmaceuticals - medicines developed by small, scientist-run start ups and pharma giants to treat specific diseases more effectively.

Typically, these companies are founded with the goal of utilizing a specific biological hypothesis from which they attempt to develop, test, and then market pharmaceutical products. One of the things that makes the space so interesting is that the odds of a company actually succeeding are very low due to the scientific difficulty of developing new pharmaceutical drugs and the challenges associated with new drugs performing well in clinical trials. However, the payoff associated with bringing a new drug to market is incredibly high, and patent protection laws ensure that any company that successfully develops a new drug retains sole rights to sell it for several decades. Since the process of researching, developing, and testing a new drug is so expensive, biotechnology companies often IPO at a very early stage, allowing public investors to participate in the equity upside that follows positive clinical results and the release of a new product (e.g. Pfizer on 11/9/2020).

This is exactly the path taken by Black Diamond Therapeutics, a Massachusetts-based biotech company focused on a field in biotechnology called "precision oncology". Precision oncology is an individualized approach to treating cancer that examines the genome of a patient's tumor and allows doctors to prescribe treatments shown to successfully treat cancers with similar genetic markers. During its IPO, Black Diamond stated that its "Mutation-Allostery-Pharmacology" platform would allow it to leverage genetic data to develop drugs that would treat cancer more effectively than products currently on the market. Apparently, the stock market agreed with Black Diamond and the company's shares doubled on their first day of trading early in 2020:

Black Diamond Therapeutics Stock Price YTD November 2020

As the above chart illustrates, shares of Black Diamond Therapeutics have mostly traded sideways since their big first day on public markets. This is because, at the moment, Black Diamond's pipeline consists one product currently in Phase 1 clinical trials and a second product in a pre-clinical phase:

Black Diamond Therapeutics Product Pipeline

Essentially, when a biotech firm believes it has a drug that has a viable medical application, it must subject the drug to three rounds of clinical testing that assess whether patients who are treated with the drug have better clinical outcomes than patients who received the normal standard of care (and if its safe to actually take the drug). Once a drug has passed all three phases of the clinical trial process (and received FDA approval), its producers receive exclusive commercial rights to sell the drug for the approved medical uses. Statistically, the odds of a drug actually making it to market (and thus generating revenues for its maker) increase each time it passes a stage in the clinical trial process. Correspondingly, since the market values companies based on their future earnings, the value of a small biotech firm like Black Diamond Therapeutics will increase as a drug gets closer and closer to being clinically viable.

In other words, Black Diamonds 9 month chart is reflective of the fact that the company, and the market, is currently waiting to see how its BDTX-189 drug will perform in Phase 1 clinical trials. Should the drug do well and prove ready for phase 2 clinical trials, investors in Black Diamond should expect a material and immediate bump in share price, which should hold fairly firm pending further news. Alternatively, if Black Diamond's BDTX-189 perform poorly in Phase 1 trials, a drop in share prices are all but certain. This is very much a "trade the news" scenario.

This type of pricing dynamic is typical of small cap biotech stocks. This allows investors to make educated bets on which biotech firms are the most promising and benefit as those firms advance new pharmaceuticals through the clinical trial process. However, as a layman, it can be hard to understand the science that drive these companies forward, which makes it difficult to make a well-educated bet on a particular firm. Given the size of the potential payout however, with biotech stocks, the juice is worth the squeeze.