The biotechnology or ‘biotech’ sector is one of the hardest sectors to invest in. Biotech investing is for the robust investor seeking high risk/reward on a roller coaster. It’s not for the risk averse.
It is possible to make money provided you (or your wealth manager) know the biotech market well and are able to pinpoint a solid company with earnings potential.
Biotechnology is cutting edge science, the manipulation of living organisms to produce commercial products for example, genetic engineering, new chemicals, new bacterial strains, pharmaceuticals.
It also covers agricultural tech, such as pest resistant grains, and has marine links via the search for control of noxious water-borne organisms.
Understanding the complexities
Even with the advantages of the internet, for non-scientists understanding what these companies do exactly, and what is their market, is complex.
Much biotech business is medical, full of up-to-the-minute research to develop treatments for many different human conditions. There are 10,000 diseases and so far the world has supplied treatment for only 500 of them. Global demand for better health, as the population lives longer, grows by the minute, as do the investment opportunities.
Famed fund manager Neil Woodford has invested 10% of his Woodford Equity Income fund into biotech, thereby endorsing the sector.
He says, “We are on the cusp of some extraordinary breakthroughs in the UK’s life sciences industry and I am very excited about the long-term value opportunity.”
Biotech researcher. Source Google Images.
The vocabulary alone gives you an idea of the scale and risks of biotech’s medical mission, seeking innovative therapies for cancers, also arthritis, psoriasis, multiple myeloma, ulceritic colitis, immune inflammatory disease, diabetic foot ulcers, Alzheimer’s disease, Crohn’s disease, and on and on.
Even if you narrow down a short list of promising biotech stocks there could be factors that you, and even the company itself, didn’t think would arise.
Many companies can’t keep all the plates spinning - the financing, the stiff competition, new regulation, the research pipeline, the drug trials and the drug administration’s decisions around the world.
Small companies are very small compared with the big ones
Small firms based in the UK such as Sinclair-Pharma, Motifbio, Alliance Pharma, Dechra Pharmaceuticals and Genus don’t have the financial and marketing clout like the big firms - AstraZeneca, Pfizer, Roche, Merck, GlaxoSmithKline, Hikma, Takeda, Novo Nordisk, Otsuka and Bayer.
However, there are healthy signs of smaller firms making efforts to diversify to bring in incomes. Given that only 10% of drugs going in for a first clinical trial reach approval for use, it’s not surprising that so many don’t make it. There is always the hope for the investor that a biotech company will be taken over.
One of the reasons why biotech is high risk is that there are many - 1,000 of them in North America alone, mostly unquoted. They all fight for funding, recognition and research success with their specialities often overlapping.
These small companies have it tough. For years they often have minimal earnings. They need investment funds to put into drug research and development, so austerity all round is a constant. Their clinical trials may, and do, fail and so damaging their reputation.
The market is always braced for failure
One long term fan of biotech companies’ sums up the realities of putting money into biotech: “You have to accept it’s a bit of a lottery. I became interested, for about five years, in a British form, Ixico, which concentrated on a drug to help Alzheimer’s. In the end its drug trials didn’t come right, so I lost out.”