By following these few steps, you could be well on your way to bagging the next top biotech jackpot…
Like a sprawling suburban shopping mall, biotechnology is a vast and expansive space containing companies of all shapes and sizes.
Venturing in can be overwhelming at times, and there’s a chance you could get lost among the many vendors scrambling to sell you their latest and greatest products.
Some companies certainly do better than others, but most typically fail. And like most malls, you tend to see a revolving door of unproven businesses willing to come in and take a shot at success.
So how do you know which ones will last and which ones will burn through their cash?
What steps can you take to identify the winners and avoid the ones selling snake oil?
How can you maximize your chances of hitting a homerun?
There are numerous approaches to investing in biotech. However, four fundamental questions specific to the biotech industry investors should pay close attention to.
By knowing the answers to these questions, you will learn how to weed out the profit-robbing imitators from the true innovators.
1) How is this technology better than what already exists?
As mentioned, biotech is a fiercely competitive sector. So if a company’s product cannot distinguish itself from the herd, it will not see the light of day or stand to survive for very long.
The technology needs to clearly demonstrate that it has a distinct advantage or benefit over what is the current status quo for a particular ailment.
Simply put, it needs to either cure a problem or remedy a problem better than its competitors. This could mean such factors as less severe side effects, reduced recovery time or decreased dosage requirements.
Costs should also be taken into consideration when it comes to benefits. The market tends to respond well to effective products that are affordable compared to the other available options.
2) How large is the potential market for this technology?
While no ailment is more important than another, from an investor’s standpoint, it’s imperative to know the market size that the medicine or treatment is catering to.
A breakthrough technology that has the potential to help millions of people is potentially more lucrative than a niche product that applies to only a small percentage of the population.
By knowing the product’s cost, the market size can also be quantified in dollar figures. And a market opportunity valued in the billions would certainly attract more investor attention compared to a rare disorder.
With that said, bigger doesn’t always mean better if the market is already (or has the potential to be) saturated with competitors all vying for the same customers. Inevitably there will be winners and losers in this situation.
3) Are people, insurance companies, or governments, willing to pay for this technology?
Again, this is where costs are important. Bringing a new biotech product to market isn’t cheap — development, trials and approvals can amount to billions of dollars and take years to cycle through.
Products need to be priced strategically such that buyers are willing to pay (affordability) while companies are still able to make back their investment and earn a profit.
Government-run programs such as Medicare or private insurance plans will often decide which remedies they’ll pay for based on what currently exists in the market.
If a technology consists of proven ingredients already widely accepted in the industry, or if clinical trials of it have demonstrated marked improvement over its predecessors or competitors, the payees would be more inclined to cover them.
4) What near-term catalyst(s) have the potential to propel this technology?
Value-drivers can be wide ranging. From key government legislation to health epidemics, any major development can instantly turn a quiet, low-flying stock into a ten-bagger.
However, a single biotech company has very little control over such game-changing factors.
Instead, investors should keep a close eye on the stages that a company goes through with its product development.
Once an application is approved by the FDA to begin human testing, a firm will typically go through three test phases with its product – Phase I, II, III clinical trials – before receiving the final FDA approval or denial.
Each of these stages can make or break a stock, so finding a company that favorably answers the three other questions we asked earlier should up the chances of passing through them.
Once you believe the company stands a good chance of moving through each phase, the ideal strategy is to buy in between the catalysts.
It is within these gaps that the stock usually loses some of its buzz and stabilizes – presenting a nice opportunity to buy in.
Of course, after each successful stage, momentum could carry the stock further before it stabilizes again.
A word of caution here is timeline.
Finding a company while it’s in between phases may be good, but be aware of the length of time until the next catalyst.
A few months or a few years can mean a world of difference.
You see, many small biotech companies won’t make a single dime during its life span, so they survive on borrowed money that needs to last them until they get FDA approval.
Running out or being forced to raise more cash before that happens could kill a stock, even if the product is passing the trials with flying colors.
As gut wrenching as it may be, with a tough stomach and little luck, biotech investing can be a profitable and exciting way to rev up your portfolio.
Just remember that the key factors above are specific to biotech companies, but standard due diligence on researching any type of company still applies.
If investors do their homework and the right call is made, the pay off could be massive.
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