Every new drug must pass three stages in order to qualify to receive FDA approval, and even then the FDA's endorsement may include warning labels or unsightly disclaimers. Each phase is a time consuming process requiring constant financial support, the reason why many biotech stocks IPO in the first place. The question for average investors is whether to bet a portion of your portfolio on risky but potentially revolutionary medicines. The key is calculating the risk to reward ratio and developing an exit strategy whether a stock's price action plays out in your favor, or not.

Developmental biotechs are basically cash burning operations for at least 12 years after an IPO, so do you have the patience to buy and hold long term? If you are excited about investing in a scientific business with a possible breakthrough drug, then its PR has succeeded. After all, roughly half of all drug candidates are only in the discovery stage. Therefore, companies usually promote their 'miracle' ideas to attract financing for the completion of Phase 1 trials. The emphasis is on the vision but with the rising costs of intellectual property, extended corporate limitations, and lack of government subsidies; only a small percentage of capital is allotted to research and development. Phase 2 trials are designed to prove efficacy and Phase 3 determines scalability.

While technical analysis helps investors determine the best stocks in which to be invested, bear in mind that it is not safe to bet on upcoming FDA news, as investors in Arena Pharmaceuticals Inc. (NASDAQ: ARNA) and Viropharma Inc. (NASDAQ: VPHM) recently learned. Only occasional winners create exponential gains, like Dendreon. After all, the vast majority of developmental drugs fail and out of the few successful drugs, even fewer become true blockbusters. Those precious few long-term winners belong to (or get snapped up by) industry heavyweights like Amgen Inc. (NASDAQ: AMGN), Johnson & Johnson (NYSE: JNJ), Merck & Co. (NYSE: MRK), Procter & Gamble Co. (NYSE: PG) and Genzyme Corp. (NASDAQ: GENZ), which have not only achieved their goal of helping society by providing medical advancements but also have rewarded their shareholders.

Basically, if you were able to buy a piece of Dendreon yesterday before its positive drug news, congratulations! But as Andrew Mickey, the Chief Investment Strategist of Q1 Publishing said, "investing in biotech stocks is like buying a lottery ticket. The payoff is big, but the odds are stacked against you."

Daleela Farina can be found on Twitter @daleelafarina