How to Invest in Biotech Stocks
Biotechnology, in essence, is a field which utilizes core principles of genetics and the human genome in an effort to produce useful pharmaceutical, diagnostic and screening products. In addition to harnessing normal, known components (e.g., a knowledge and utilization of the genes found within the human genome), biotech companies will soon also develop products based upon an understanding of mutations characteristic of pathologic states and disease. Combining core principles of genes and genetic engineering with databases of genomic information, biotech companies are beginning to eliminate waste associated with previous, “trial and error” based approaches of product development characteristic of the past… In biotechnology, we have seen only the tip of the iceberg… There are no limits.
Currently, there are nearly 1000 biotech-based products in clinical trials. In order to reap the rewards of investing in biotechs, I would recommend a few general guidelines. The greater the number of parameters that can be met, the greater one’s chances of success in today’s often volatile market. So, without further delay, here’s what one should look for:
Solid Market Potential of Product
What are HOT areas which will reap large returns for a viable product? To name a few:
1) HIV/AIDS
2) Cancer
3) Diabetes
4) Heart Disease, Stroke
5) Neurological disorders (Alzheimer’s Disease, Parkinson’s Disease, Dementia)
6) Immunological Diseases (Lupus, Diabetes, Rheumatoid Arthritis, etc…)
7) Tissue Regeneration
Pick Companies with Strong Collaborative Support
Large pharmaceutical and biotech companies often serve as “big brother” supporters of smaller biotech companies. They provide vital logistical, financial and ultimately, commercialization support for the sponsored biotech company. Biotech companies with multiple, powerful collaborators are better off than those with few, as withdrawal of a collaborator due to missed milestones, strategic differences, etc.. can create great short term destabilization of a biotech company. Companies which are great examples of solid collaborative support: Abgenix, Medarex, and Vertex.
Pick Companies with AT LEAST Two Years of Cash Reserves
The bane of most biotech companies stems primarily from a deficiency of cash reserves to finance ongoing research and development operations. Cash reserves can come in the form of private financing, milestone payments, as well as capital derived by the sale of secured and/or convertible debt securities (in order of stabilized source of funding). Note, however, that those companies which have raised cash via excessive dilution of shares, (i.e., via issuance of secondary stock offering) are less favorable than those which abide by initially predicted rates of cash consumption: make sure that a company has not excessively diluted their existing shares to provide cash reserves. This is often a last resort and may soon result in financial insolvency.
Select Biotech Companies Whose Product Pipeline has AT LEAST 2 Products in Clinical Trials
The reasoning for this are obvious. If one product fails to reach approval throughout the FDA trial process (i.e., phase I, II, III for pharmaceutical products and phase I, II for device products), the company has another product which it may fall back upon.
Look for Companies Whose Products Will Soon Hit the Market
Companies with at least one product in end-stage trials are better investments than those just beginning the investigative phases of development. Remember, it may take as long as ten years for an agent to progress from initial development to full FDA approval and production… Be VERY SKEPTICAL if a company claims it has found the “cure for cancer,” the “elixir of everlasting life,” and other preposterous claims. In addition, be wary of investing in companies whose data thus far stems only from trials in cell culture dishes or in model systems such as mice… If a product will be used to treat humans, then the company should at least be ready to begin human trials before you should consider it as an investment.
Look for Companies Whose Managers have Research Experience
Though my view may be biased here, I only trust those companies whose top managers have been actively involved in research… Look for senior managers who bear a Ph.D, M.D., and/or M.D./Ph.D. Their knowledge of the technological process at hand will be invaluable in efficient allocation of resources towards ultimate product development.
KEY WORDS to LOOK FOR
Genomics, database, antibody, transgenics, vector, virus are but a few “flag” words whose presence in the description of a company stimulate both short and long term momentum.
