• Biotech can be an investment sector where you can
become rich and it can be where you lose everything.
• Knowing how to evaluate investments in biotechnology
can make all the difference.
• The rationale for investing in biotech is that a company
will invent a new medicine or product that will change the
world and generate huge sales in the process.
• The common reasons for avoiding biotech investments
are that the vast majority of prospective products never
make it to the market and that evaluating the prospects of
a biotech investment can be very difficult to the point of
bordering on guesswork.
• However, there are a series of steps to take that will
greatly improve you odds of success.
• Here are the basics.
• What is biotech and what is not?
• What is your risk tolerance?
• What are the general risks of biotech and your
investment in particular?
• What should you be looking for in a biotech investment?
• Check out the top biotech stocks as well as biotech
• Proceed with caution.
• Keep close track of each individual investment.
• Here are the specifics of our thoughts about how to
evaluate investments in biotechnology.
• What Constitutes a Biotechnology Investment?
• Biotechnology means that the processes involve living
(biological) organisms. A good example is the use of
genetically altered e coli bacteria to produce human
insulin. Although we usually think of biotech as being
equal to the development of medications, the category
includes things like genetically modified foods.
Genetically engineered plants that are more resistant to
diseases or chemicals fall into this category as well. The
processes involved need to include the use of biological
• And, the use of biotechnology needs to be a major part of
the company you are investing in. While many large
pharmaceutical companies work in biotechnology, the
fractions of their work and profits are small. As such they
are considered biotech investments.
• Note: Because many investors mistakenly consider any
small pharmaceutical startup company to be “biotech” the
name may stick even as the company grows and does
little or no work in the biotech arena.
• When screening for biotech stocks, simply check the
industry designation to make sure that a stock is biotech.
For example, “Med-Biomed/Genetics” is a biotech stock
designation. This means that the company works in
biotech as its primary focus and source of profits.
• What Is Your Investment Risk Tolerance?
• If you are interested in investing in stocks without losing
any money, the vast majority of biotech investments are
not for you. Any investments in biotech that you make will
be in established companies whose stock prices already
reflect their success. Two ways to reduce your risks are
these. Invest in ETFs that track a basket of biotech
investments or invest in your own carefully selected
group of biotech stocks and track them very closely.
• Not paying attention in the biotech investment world is
equivalent to throwing you money away.
• Risks That Are Unique to Biotechnology Investments
• Every biotech product starts with an idea. The company
needs to efficiently and cost-effectively translate that idea
into a product they can sell. In the medical product sector
of biotech drugs need to work for the purpose intended,
not cause any harm, pass strict clinical trials and have a
large market to sell to. At any step along the way, a
biotech drug may fail to pass a regulatory step. And,
these drugs have limited exclusivity and patent protection
so when these expire, other companies move in to make
the same drug without having incurred the developmental
• Biotech meds typically come to an investor’s attention
when a drug enters FDA clinical trials. This starts with
“pre-clinical” testing which is done “in vitro” in the lab and
with test tubes. It progresses to “in vivo” testing with
• Only after a drug has satisfied the first steps does it
progress to “clinical” testing which is use in humans. The
vast majority of biotech drugs never get this far.
• In order for a drug to be OK’d for use in the USA, it needs
to work and it needs to cause no harm. This is tested in
three steps which also determine the appropriate dosage
in people and the incidence and types of side effects. The
success rates for drugs that get this far are as follows:
• Phase 1: 37% pass
• Phase 2: 30% pass
• Phase 3: 60% pass
• FDA approval: 85%
• The stock prices of these companies may be particularly
labile when results of phase 1, phase 2 and phase 3
testing are due.
• There are many drugs that are perfect cures or
treatments for rate diseases or diseases that are
prevalent in poor countries where no one can pay for the
drug. They get developed but they are never profitable
and are commonly referred to as “orphan drugs.”
• And, in the USA, Europe, Japan, and other nations,
government run health care programs and insurance
companies need to pay for the drug at a price that makes
the whole process economically feasible. And, it all needs
to work out before their period of exclusivity (12 years in
the USA) and patent protection (20 years in the USA) run
• What to Look for in a Biotechnology Investment
• The safest biotech investments are companies that have
products that are approved and making money and a
“pipeline” of drugs and other products at all stages of
development and regulatory approval. The company ideally
has a good track record of picking ideas and bringing them to
fruition in a reasonable period of time.
• Ideally the company is making billions of dollars and its
intrinsic stock value is such that it is an obvious buy. And, don’t
be surprised to learn that such biotech investments do not
exist. But, the best investments have a good product lineup, a
promising pipeline, a strong financial position, and a fair price.
• Predicting biotech success is chancy. Because many
startup biotech stocks have one of two products in their
pipeline and no guarantee of success, they are largely
“story” stocks. The more you know about the details, the
more secure your investment will be.
• Although you may have no clue as to whether a drug in
development will work out, there are folks who have more
insight. When you see that a major pharmaceutical
company has partnered with a small biotech startup, you
know that someone with the right technical expertise is
• In the end, the more you know about a sub-sector of
biotech, the more successful you will be. This means that
you focus on an area of development that you
understand to a reasonable degree and then apply
fundamental analysis to the degree that is possible.