Biotechnology has famously improved our quality of life for decades. It addresses many global health problems, such as infectious and age-related diseases. Investors can see the potential for significant gains in this sector, due to its potential for new sources of return and diversification of risk. However, this also comes with the possibility of losses. The S&PBiotechnology Select Industry Index’s “basket” approach to allocation may provide a solution for those concerned with risk. It aims to provide diverse exposure to listed biotechnology (biotech) companies across large-, mid-, small-, and micro-cap companies in the U.S.
WHY INVEST IN BIOTECHNOLOGY?
Based in genetic analysis and engineering, biotech firms primarily engage in the research, development, manufacturing, and, to a lesser extent, marketing of healthcare products based on genetic analysis and engineering. Biotech has a few important industry-specific characteristics.
- High Investment and Long Waiting Period: It can take as much as a decade to get a new drug from the test tube to the pharmacy shelf. During this lead time, biotech companies may not generate revenue, and hence are highly dependent on venture capital funds and trading publicly on stock exchanges to fund research and development.
- High Risk: The discovery of new drugs is an expensive, slow, and risky business. Investors need to be aware that the risk of failure of new drugs to reach approval is exceptionally high. Typically, 85%95% of all new drugs fail to reach approval.[1] Historically, many biotech companies have experienced serious losses after failing critical research or drug trials.
- High Yield: During the research phase, biotech companies tend to be unprofitable. However, once a new breakthrough drug is discovered that proves to be successful in treating diseases, it has the potential to be highly (or exponentially) profitable. Then, the high yield is protected by adequate IP or copyright to ensure that the company can appropriate its research and design results and reduce the likelihood of imitation by competitors.The rewards and risks of investing in biotech stocks can be significant. Key factors to consider include the research pipeline, stage of research and clinical trials, secure sources of future financing, regulatory changes, and mergers & acquisitions.
