11 Things to Know About Investing in Biotech Stocks
T he biotech industry is super hot right now. Many of the companies out there have the potential to bring in huge returns, but the accompanying risks can be pretty steep. Besides that, not every biotech company and security are created equally. Before you start investing in the biotech industry, you should know a few characteristics of the sector and how to go about trading these tricky securities.
- Biotech stocks are high risk and high reward.
- Researching the company is vital.
- Active trading on biotech stocks is a must.
What Are Biotech Stocks?
Image via Unsplash by @nci
The biotechnology industry uses living organisms to make commercial products, like pharmaceuticals and superior crops. In the stock world, biotech is often used as an umbrella term for any company that develops new drugs, whether the components are biological or not. This sector is constantly changing, growing, and developing as scientists discover new ways to treat illnesses and diseases, making biotechnology stocks a favorite investing choice for many traders.
Why Invest in Biotech Stocks?
People invest in biotech stocks for many reasons. First, many investors feel good about investing in a company that’s trying to help people live longer, healthier lives. Second, if the potential drug is successful, investors stand to make an extraordinary return on their investment. Third, the potential for strategic trades is high with biotech stock since any piece of news, positive or negative, from the company can send the price skyrocketing or falling only to change course the next day with the introduction of new information.
How to Invest in Biotech
Biotech stocks are historically volatile. Often, the value of the stock is all speculative and based on the promise of a new drug or treatment. Until the drug proves viable, receives FDA approval, and hits the market, investing is a big gamble. However, stock prices for these companies are often very low right up until news breaks. If you do your research and get in early, you can make a tremendous amount of money in this sector. Follow these steps to vet any biotech investment you’re considering.
1. Determine the sector
As mentioned, ‘biotech’ can be used as an umbrella term for any pharmaceutical. If you want to invest in a true biotech company, one that works exclusively with biological material, you need to learn about what the company does rather than just looking at its designation.
2. Establish an acceptable risk
Know how much money you’re willing to risk if the stock goes south. Establishing this before you find a company you’re excited about will hopefully help you act judiciously when it’s time to actually pay out for shares rather than acting on impulse and emotion.
3. Know the downsides
Biotech is risky. Even the ‘safe’ bets carry risk. Keep these common disadvantages of biotech investments in mind:
- Clinical trial failure: If the drug fails in clinical trials, the company has to essentially start the scientific process over, which can take an enormous amount of time and send its share price spiraling.
- Approval delays: Regulatory approval can take a long time. Even if a drug does well in trial, until it comes to market, the stock value might plateau or drop.
- Commercialization setbacks: With all approval in place, the company still has to get the drug to market and hope it sells.
- Competition or patent problems: Sometimes, while waiting on steps like trials and approval, competitors will beat the company to market or the patent on the drug might run out. Either of these scenarios can damage the share value.
4. Assess the company’s history
Learn about the company. See how quickly they’ve gotten other drugs to market and whether or not those drugs have good commercial sales. Biotech companies pop up all the time with no history to review. These investments are particularly risky, but also offer some of the highest potential payouts if they’re successful.
5. Keep your portfolio diversified
Avoid putting too much of your money into the biotech sector. Keep your portfolio diversified in case your investment doesn’t pan out. Greed can lead to devastation.
6. Check-in regularly
Biotech stocks are not investments you can purchase and sit on for years. Keep track of price, volume, and news from the company to see if you should invest in more stock, part with the shares you have before losing money, or sell at a profit.
Tips for Investing in Bio Stocks
Use these 11 tips to help you find great potential investments in the biotech industry and make data-driven, research-based trading decisions.
Know Where the Company is in the Process
It might cost slightly more to get in when a company is out of the clinical trial stage of product development, but it could potentially save you from losing a lot of money if they don’t even make it that far in the process. It’s important to know where the company is in development before buying in.
Know the risk the company presents. You’ll want to assess history, stage of development, pipeline, partners, cash-on-hand to debt and ‘potential’ cash, and the company’s leadership and reputation. If you feel uneasy about more than two or three of these factors, it might not be the best risk level for you.
Look for Companies With Multiple Plans
It’s tempting to put all your money into a company that’s focused on a single product and putting all its money and resources into it. However, it’s often a safer investing move to find a company that has several ongoing projects in case its front runner fails.
See Who Is Investing
Look and see who’s investing in the company. Often, big-name companies, either in the industry or even some from outside, will put money into the biotech firm’s research and development. You want a solid amount of funding from reputable sources.
Find Companies With Partners
Support, support, support. Any company at risk of going under should their one drug lose viability is not a great investment. Look for companies with partners who can continue project funding should the front-running drug fail at some stage in the development process.
Know the Cash to Biobucks Ratio
The biotech industry uses the term ‘biobucks’ as a synonym for potential payouts should their drug make it to market. Many biotech firms calculate their support using upfront cash and biobucks. If you see an announcement that a biotech firm just got a huge deal, look at the fine print to see how much of that is cash now and how much is conditional.
Look Past the Press Releases
Reading the news about the company and its development progress isn’t enough. You need to dig into its research and see how frequently researchers are performing clinical trials compared to how often you see ‘news’ about the company. You want actual progress, not just the illusion of progress.
Read the Reports
Take the time to review the actual reports on clinical trials. It’s easy enough to spin findings positively for a layman’s press release. It’s harder to disguise facts in a scientific study. You could get ahead of a bad move by checking the real numbers.
Look at the Competition
Multiple companies competing over the same treatment can help boost stock prices, but if you side with the losing company, you could be out a lot of money. Consider investing in companies that don’t have any immediate competition.
Consider the Leadership
Look at the leaders of the company. Learn about their history, management style, risk tolerance, and other characteristics. You want to invest in a company with trustworthy and capable leaders.
Avoid Emotional Investing
If you find yourself getting super excited about a potential investment and itching to hit that buy button without any research, take a minute to calm down. Emotional investing without the facts can lead to disaster in the biotech industry.
Best Biotech Investments
The biotech field is constantly shifting and adapting. There are quite a few companies to get excited about right now. Check out these five biotech firms with exciting potential products. Now, we’re not brokers or advisors, so use this information as a way to practice your biotech research strategies and make your own decisions about whether or not these options are a good bet for your portfolio and investing goals. All numbers were pulled on August 17, 2020.
XBiotech Inc., based out of Austin, Texas, has been around since 2005. The company develops monoclonal antibodies for treating a range of diseases such as diabetes, skin disease, cancer, and vascular disease. They’ve had some ups and downs over the years, but they do have multiple products in development and some solid funding.
- Ticker: XBIT
- YTD return: -1.79%
- One-year return: 111.04%
- Five-year return: -6.62%
Vertex Pharmaceuticals Inc.
Vertex is a global biopharma company that’s been producing treatments for diseases like neurological disorders, cancer, and autoimmune diseases since 1989. Vertex partners with some impressive top players in the biotech world, and with a solid history of successful products, looks to continue its upward trend.
Novavax is in the news quite a bit since they work on vaccines — they’re one of the companies pushing to find a COVID-19 vaccine before the end of the year. Because of this, their returns are astounding. This is one you’ll definitely want to do your own research on before making a move.
Regeneron Pharmaceuticals has an impressive history of over 30 years of successful treatments in immuno-oncology and bispecific antibodies. Regeneron partners with some other big players and has a consistent, dependable pipeline of potential treatments at the ready. They clearly know what they’re doing with such a long tenure in a cutthroat industry.
Exelixis develops drugs to treat multiple types of cancer, including skin, liver, and kidney. The company was founded in 1994 in Massachusetts but moved its operation out to California a few years later. The biotech firm has enormous cash reserves and multiple projects working through development.
The biotech sector is enticing but risky. Do your homework before you invest in biotech stocks so you know exactly what you’re getting into.