Highly lucrative but equally risky! This is what the world of investment says about Biotech Stocks. They have the potential to generate huge profits for investors but come with equally high risks associated with them, making it something that’s not everyone’s cup of tea.
Here are the 5 tips on how to go about investing in this particular type of stock to stand a chance of being successful.
Learn to differentiate between Biotech Stocks and others
Biotech is a field of technology that deals with biological organisms. Therefore, only the companies that make genetically modified organisms using clinical research or the ones making biological drugs come under the category of Biotech Stocks. For example, companies like Jubilant Biosys that provide structural biology services globally.
Yes, there are big pharmaceutical companies as well that develop biological drugs but their primary source of revenue is through other type of drugs. At times, small drug makers too are categorised under “Biotech companies” but they may not even be making biological drugs.
To avoid this confusion, you should just check reliable websites that lists biotech stocks of the companies and invest accordingly.
Determine your risk appetite specific to biotech stocks
You may either be an aggressive investor who is ready to incur huge losses if an unfortunate event occurs or a conservative investor who takes things slowly. To know the kind of investor you are is important as it helps you determine the kind of biotech stocks you should invest in.
Most biotech stocks will interest only aggressive investors. However, unlike other high-risk stocks, the biotech stocks have some specific risks that stand true only for them.
- The risk of clinical failure – If the company you are investing in has drugs still in the preclinical testing phase, then it is quite risky to invest in them. Most experimental drugs do not complete the journey of preclinical testing to clinical studies as most companies do not have a good preclinical CRO working with them.
- Regulatory approval setbacks – Nearly 15% of the drugs submitted for approval do not get the regulatory approval.
- Commercialisation problems – Even if a drug does get the approval, many times, hospitals and governments do not provide the necessary funds to manufacture it.
- Loss of exclusivity/ patent expiration – There is a 12-year exclusivity norm for biosimilar drugs and a 20-year patent period After this period is over, other companies can produce copycat drugs resulting in a loss of value of the original stocks.
Know what to look for in a Biotech Stocks
An ideal biotech stock will have a deep pipeline with multiple candidates in phase 3 of the testing stage apart from their current line of products that is already available in the market. Such companies usually work with leading contract research organization like Jubilant Biosys to maximize their profits. In such a case, the company would be super profitable and it surely makes sense to invest in its stocks.
Thus, you should look for biotech stocks that come close to this ideal, according to these four parameters – current product line up, pipeline, financial position and valuation. If they have their current line up diversified into multiple therapeutic avenues, then this always makes it less risky. A pipeline with multiple late-stage experiments should also be preferred.
Look at the cash position of the companies irrespective of their size because the ones with the better financial position are safer to invest in. When it comes to valuations, you can check the traditional metrics to understand the position of bigger companies. But for smaller companies, you will have to look at the partnerships they might have established with big companies that offer drug discovery services to get an idea about their position in the market.
Be a cautious investor
Evaluate the top biotech stocks and ETFs before investing in huge amounts. Yes, both of these are not for investors with low-risk tolerances since biotech stocks are some of the riskiest stocks to invest in, which is why you should be a cautious investor.
You should not invest your complete portfolio in one company. Here too, diversification helps. If the stocks are of a small company with tests in the initial clinical stage, then you should be extra cautious.
Be aware of the changing dynamics
As is the case with any other industry, you should be aware of the changes in the biotech industry as well. A bad result in clinical studies can affect the valuation of stocks. Be aware of any moves by the government that limit the use of biotech in the healthcare sector.
However, having said that, bad news need not necessarily mean the stocks will take a hit, urging you to pull out the investments immediately. Assess the situation first with experts and then make a move.
With all these steps in mind, you should be able to make good investment choices. You may want to first consult with the respective biotech company and understand their previous performance record to have a better chance of coming out with good returns in your investments.