Investing in biotech can be incredibly rewarding, but it also comes with considerable risk. The space continues to see rapid growth, and it’s relatively easy to acquire stocks because of that. New products are constantly coming to market, from drugs to medical devices, vaccines, and therapies.
But along with the rewards, there is considerable risk. Biotech investment plummeted after an all-time high in 2021, resulting in many startup failures and losses for investors. The good news is that current signs indicate the industry’s recovery to pre-pandemic levels, fueled by lower interest rates and renewed investment from big pharma.
If you’ve considered investing in biotech, you might wonder what opportunities are available and which are right for you.
Is Biotech a Good Investment?
While all investments should be weighed against your risk tolerance, I have a few thoughts I’d like to share about biotech. As always, don’t hesitate to reach out if you want to explore the possibilities.
The risks
The biotech industry has unique risk factors you should know before investing. Due diligence will reveal what you need to know. The biggest risks include:
-Funding. Big projects require big funding. If a biotech startup fails to raise what they need, they will likely continue to struggle and won’t be able to reach maturity. Avoid startups that are having trouble reaching their funding goals.
-Failure to go beyond the clinic. New drugs often fail at the clinical stage. Early-stage investing has the greatest potential for failure, especially in Phase 1, as the product is not fully formed. Phase 2 is slightly less risky, but the product will not have yet passed FDA. The startup will need a massive influx of cash to get through this phase, but there are still no guarantees. Phase 3 is less risky as the product has obtained regulatory status and is approved for testing. Investing at any stage after Phase 3, such as late-stage clinical trials or pre-market launch, carries the least risk and is more likely to yield a return.
-Market failure. Even the most innovative biotech products can fail commercially. To succeed at the commercial level, the product must be a viable solution to a widespread problem, gain prescriber buy-in, and be sold at a price that gives the company adequate return to recoup its losses. If the product does not thrive, shares will devalue, plain and simple.
-Lack of cash flow. Biotech firms, especially startups, typically operate at a loss for many years before seeing any significant gains. If you want to invest in something that will pay dividends in the short term, this might not be the way to go.
The rewards
Successful biotech products can potentially deliver incredible returns. All the elements must align to ensure success, so you must consider your decision carefully.
-Novel products. The most successful biotech products focus on solving a significant or pressing problem. The COVID vaccine is one example, but there are many others, including gene therapy for functional cures, brain implants to regulate seizures, procedures to reverse congenital defects, advanced diagnostic tests, etc. These products are developed to benefit a wide swath of humanity and can potentially make life better for a huge portion of the population.
-High growth. Biotech is finally back in a growth phase after a steep decline in 2022-23. 2024 saw investments that well exceeded pre-pandemic expectations. Market forecasts predict a CAGR increase of 13.96% through 2030.
-Potential for high returns. Not many industry sectors have single-product companies capable of going from zero to billions virtually overnight. NVAX is a perfect example, having secured funding from the US government to the tune of $1.6 billion.
-Social impact. We all want to do good in the world. Being a part of biotech innovation means you are helping to advance science and are, therefore, part of the solution.
Considerations for Investing in Biotech
Considering the above points, it’s clear that due diligence and research are required before choosing a biotech company to invest in. Here are a few tips and considerations to remember before committing.
-Get evidence. Don’t get too hung up on the story. Biotech companies are almost always founded by passionate people and researchers who genuinely believe they are changing the world. Many have incredible stories, missions, and plans to revolutionize XYZ – IF their product goes to market. Gauging the success of any one endeavor can be challenging, so consider the company’s history, reputation, past wins, and the problem they’re solving.
-Who’s on board? Learn who’s got skin in the game already. Biotech products backed by big pharma may be more likely to succeed. Having the backing of a major player is solid proof of that.
-Understand the regulatory environment. If a biotech product has little chance of approval, it’s not a wise investment. Learn a little about the regulatory hurdles they will need to climb. It may not be a good bet if they face an uphill battle due to safety, ethics, or environmental issues.
-Consider biotech ETFs. ETFs are funds that spread the investment over several biotech stocks, giving you exposure to the industry as a whole without putting all your eggs in one basket, so to speak. Some funds focus on specific niches within biotech, while others provide broader exposure. As always, due diligence on the companies represented by the ETF is recommended.
Final Thoughts
Biotech investing can be incredibly rewarding from many standpoints. However, it also comes with significant risk. With a bit of research, good advice, and ensuring the investment does not dominate your portfolio, you could be on track for big returns.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.
Investment forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.