Biotech stocks have a talent for making smart people do spectacularly dumb things. The pattern is almost predictable at this point.

You stumble across a "breakthrough" that sounds like it was ripped from a science fiction novel. Some tiny company with a market cap smaller than a decent Manhattan apartment is developing a therapy that could revolutionize treatment. Your brain immediately conjures up a chart—flat line, flat line, then straight vertical. You buy a small position because missing out would feel worse than losing money, telling yourself you'll add more if the story improves.

Then biotech does what it always does. It reminds you that in this corner of the market, the business isn't the product. The business is the trial.

That single insight explains most of the pain, and most of the opportunity, in biotech investing. With normal companies, you can examine customers, margins, competitive moats, and dozens of incremental indicators showing whether management is executing. In biotech, your "indicator" is often a binary event wrapped in statistical significance, regulatory whims, and biology's cruel sense of timing. One press release can vaporize 50% of your capital before you finish your morning coffee. That's not hyperbole. That's the price of admission.

The Risk Catalog Nobody Wants to Read

Clinical risk is the obvious monster under the bed. You're betting on biology, and biology doesn't care about your spreadsheet. A drug can look fantastic in early studies and collapse in larger trials. It can work on surrogate endpoints while failing to deliver meaningful real-world benefits. It can show promise in one patient subgroup and disappoint everywhere else. Sometimes the safety profile kills the program, not the efficacy. Most investors treat these setbacks like bolt-from-the-blue surprises. They're not surprises. In biotech, failure is the baseline expectation and success is the weird outlier.

Regulatory risk is clinical risk wearing a bureaucratic disguise. The FDA isn't just counting p-values and calling it a day. It's deciding whether the benefit justifies the risk in actual human patients. The agency can demand additional data, challenge trial design, narrow a label, or stretch timelines indefinitely. Even a "win" can arrive with enough restrictions and requirements to fundamentally alter the economics. In biotech, time isn't just money. Time is dilution.

Which brings us to the risk that quietly destroys more returns than bad trial results ever could—the capital structure. Many biotech companies aren't traditional businesses. They're research engines funded by capital markets. They burn cash, usually on a predictable schedule, and refill the tank by selling stock. When markets are friendly, dilution feels painless. When sentiment shifts, dilution becomes a slow bleed that transforms a compelling scientific story into a wealth destruction machine. You can be completely right about the drug and still lose money because you were wrong about the financing.

Then there's the information environment, which is a polite euphemism for saying biotech is a narrative factory on steroids. The science is complex, the milestones are technical, and the incentives are glaringly obvious. Management wants to keep the story alive. Analysts want access. Retail investors want hope. Social media wants certainty. Somewhere buried in the middle is the truth, which is usually probabilistic, nuanced, and boring—exactly why it gets ignored.

That's the trap. Biotech can masquerade as investing when it's really event gambling in a lab coat. Investors stop asking what a company is worth and start asking what happens if the trial succeeds. The catalyst calendar becomes the business plan. That's not investing. That's a coin flip with a press release date.

Even after approval, commercial risk looms large. Launching drugs is hard work. Payers negotiate aggressively. Formularies restrict access. Doctors move cautiously with new therapies. Competitors respond. Manufacturing can become a bottleneck. The addressable market can be smaller than projections suggested. Pricing can disappoint. Plenty of biotech "winners" in the lab become mediocre businesses in the real world.

So Why Do This At All?

Because biotech offers something genuinely rare—the possibility of massive returns. Not from multiple expansion or financial engineering, but because sometimes the science actually works. Sometimes a small company brings a therapy to market that changes patient outcomes, expands into multiple indications, and becomes a platform. When that happens, the value creation can be extraordinary. You see five-baggers and ten-baggers, occasionally more. That's the honest attraction of biotech. The gap between what a company is today and what it could become tomorrow can be enormous.

The problem is most investors chase the upside in the worst possible way. They buy the story at the peak of the hype cycle and hope the calendar bails them out.

I prefer signals that are harder to fake.

In a market where individual investors are forced to handicap biology, statistics, and regulators simultaneously, I'll happily take evidence that people closest to the science are putting real money at risk.

Why Insider Buying Actually Matters in Biotech

Start with insider buying. In biotech, insiders may not know the outcome of a blinded study, and they face restrictions around material events, but they know vastly more than outside investors about the real state of affairs. They know trial design. They know what the regulator is pushing back on. They know the competitive landscape intimately. They know the financing needs. They know whether the company is scrambling behind the scenes or executing smoothly.

That's why I focus on cash purchases. Not options. Not stock grants. Cash purchases.

The first thing to examine is size and intent. A token purchase makes a nice headline and changes nothing. I want to see an amount that would hurt if it goes wrong. The next thing is clustering. One insider buying is interesting. Several insiders buying around the same timeframe is a signal. A CEO, CFO, and director all stepping in simultaneously is rarely coincidental. It doesn't guarantee success, but it tells you confidence is spreading among people with visibility into the actual situation.

Three Biotech Companies With Recent Insider Buying

Summit Therapeutics (SMMT) is a cancer-drug company, and the simplest way to understand their approach is thinking of their lead drug as a two-in-one weapon. One component is designed to help the immune system recognize and attack cancer cells more effectively. The other component is designed to make it harder for tumors to sustain themselves by disrupting the blood vessel support that helps tumors grow and metastasize. It's not old-school chemotherapy. It's a targeted antibody drug, more like a guided missile designed to hit specific biological targets.

That kind of approach explains why the upside can be enormous. If a cancer drug works in large late-stage studies, it can become a blockbuster product. But it's also why the stock can be brutally volatile. Expectations swing wildly. Data gets debated endlessly. Competitors matter significantly. And the market has zero patience when a high-profile result doesn't match the hype. Insider buying in a name like Summit is worth noting because this is the type of stock that can get punished savagely on sentiment alone. When insiders step in after volatility, it often suggests they believe the market is discounting the potential too aggressively. Still, the real driver is straightforward. The drug has to deliver.

Annexon (ANNX) is a completely different story. This isn't cancer. It's the brain and nervous system, which is simultaneously the most exciting and most unforgiving arena in drug development. Annexon's focus is calming down an overactive component of the immune system that may be contributing to damage in certain neurological and eye diseases. One way to think about it is this: in some conditions, the immune system isn't just fighting threats—it's also creating collateral damage, including harm to healthy connections between brain cells. Annexon is attempting to reduce that damage by blocking a specific trigger in the immune pathway.

Their main programs are antibody drugs. One targets neurological disease and would be administered through an IV. Another targets certain eye diseases and is delivered locally as an injection into the eye, which sounds intense but is actually common practice in ophthalmology. What makes Annexon compelling is also what makes it risky. Neurology trials take forever, results can be messy, and plenty of brilliant scientists have been wrong in this field. But when a brain-related therapy genuinely works, the payoff can be enormous because patients and doctors have precious few good options. Insider buying here can be meaningful because it signals confidence in a long, slow process that frequently tests investors' patience.

CervoMed (CRVO) brings us back to the brain, but with a different type of drug. CervoMed is working on a pill for a specific type of dementia called dementia with Lewy bodies. This condition can severely impact thinking, memory, and daily functioning, and there are limited effective treatments available. Their drug is a small molecule, meaning it's a traditional pill rather than an antibody given by infusion. The advantage is straightforward. If a pill works, it's easier for patients to take, usually easier to manufacture at scale, and often easier to distribute widely.

The opportunity is obvious. Dementia represents a massive unmet need, and any therapy showing meaningful benefit can attract serious commercial interest. The risk is equally obvious. Brain diseases are difficult to treat. Trial endpoints are challenging to define. "Almost works" is functionally identical to "doesn't work" when regulators and doctors are making decisions. Insider buying is a confidence signal, but it doesn't eliminate the fundamental reality that this is a development-stage company where timelines, trial design, and funding matter as much as the underlying science.

How to Actually Use This Information

That's the essential lesson for individual investors. Insider buying in biotech isn't a green light. It's a research prompt. It tells you "this might be worth a closer look," not "this will definitely go up."

Biotech stocks can move 200% on success and fall 60% on disappointment, sometimes overnight. So if you want to participate in the upside, you need rules that protect you from the downside.

The first rule is position sizing. If one biotech stock can wreck your entire year, you sized it wrong. These are not the places for oversized bets based on excitement or FOMO.

The second rule is cash runway analysis. Biotech companies spend money for years before they make any. When cash runs low, they typically raise money by selling new shares, which dilutes existing investors. In plain terms, even if the story is compelling, you can still lose money if the company has to issue substantial new stock at an unfavorable price. Always know how long the company can operate before it needs to raise capital again.

If you respect those two rules, insider buying becomes a genuinely useful tool. It helps you avoid chasing hype and instead focus on situations where the people closest to the company believe the market is mispricing the opportunity.

In biotech, hope is abundant and cheap. The edge comes from process, discipline, and knowing when a signal is just noise, and when it's actually worth turning into a position.