Investors who are interested in biotechnology should take a look at the opportunities available diligently and prudently. If you’re looking into investing in the biotechnology sector, here’s a guide for you.
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In this article:
- What Is Biotechnology?
- How Can You Invest in the Biotech Sector?
- Factors That Affect the Industry and Risks Involved in Investing
- Phase I or II Development Phase: What This Means for Biotech Companies
- 5 Biotech Stocks to Watch
5 Biotechnology Stocks to Consider for Your Retirement Portfolio
What Is Biotechnology?
Biotechnology refers to the area of science where biological processes are used alongside technology for a certain purpose, such as pharmaceutical and biomedical applications.
For investing purposes, the biotechnology sector combines different sciences. Chemistry, medicine, engineering, and other hard sciences work with finance for smoother operations.
Most biotech companies have ties with the pharmaceutical industry due to the overlap in their target market. Biotech companies also have industrial applications in:
- The Food and Beverage (F&B) sector
- Animal science
- Development of immunological techniques
- The growing biomedical engineering sector especially for prevention of diseases as well as the study of the human genome
- Manufacturing and use of organic raw materials
- The chemical industry, specifically organic chemistry, and a myriad of other industries
At first glance, investing in the biotechnology sector can look complex.
You don’t need a master’s degree or even to be a biotechnology major to understand how to invest in the biotechnology industry. What you need to know are the basics of investing in stocks.
The good thing about investing in this sphere is you can leave the science to the scientists. As long as you follow the basics of investing for retirement, then you’re already on the right track.
How Can You Invest in the Biotech Sector?
Choosing the Right Investment Account
You have to decide how you’ll invest in the biotech sector. An important consideration here is what kind of investment account you’ll be using.
Choosing the right investment account can also help you benefit from tax diversification.
Tax diversification allows you to optimize tax advantages as well as minimize expenses. Investors can put their biotech stocks in a tax-advantaged account, including:
- Traditional IRAs, which are tax-deferred accounts
- A Roth IRA or a 401(k), which are tax-exempt accounts
- Other lesser-known investment vehicles like a tax-free savings account or an HSA
Choosing Which Biotechnology Stocks to Invest In
An interesting thing about investing in biotechnology stocks is it offers exposure to the pharmaceutical industry.
The big players in the stock market either:
- Pharmaceutical companies that partner with biotech companies for their products
- Companies that have hands-on experience with biotechnology
Factors That Affect the Industry and Risks Involved in Investing
In the eyes of the investing public, biotech companies focus and operate on a high-risk, high-reward business mentality. Meanwhile, a pharmaceutical company is a Blue-Chip business that has a track record and focuses on diversifying risk.
This information can be useful for investors since not all biotech stocks are pharmaceutical stocks, even if most of them overlap. This distinction should be considered when trying to invest in this sector since the stock’s risk profile may not match yours.
Like the pharmaceutical industry, biotech companies have considerable regulatory risk. Governing bodies that provide regulations and approval can suddenly reject a proposal from the companies.
Legislative risk also affects the biotechnology sector, which adds some unpredictability.
Other than looking at the inherent legislative and regulatory risk, you also have to look at:
- Where the biotech company is with the development phase, whether Phase I or Phase II
- The specialization of the company
- Partnerships and agreements
- Hands-on experience of their scientists, biological technicians, and leaders
- Business pipeline – What their main product or source of revenue is (usually in the form of drugs). Some offer laboratory research services and techniques in biology and chemistry.
- The pipeline is the flagship product or products of the biotech companies. Projected value and the stock price come from the prediction and analysis of the pipeline.
- Not all pipelines are equal. Some diseases have a bigger market, which is something the investor should look at.
Phase I or II Development Phase: What This Means for Biotech Companies
To make investing in biotech easier, an investor should pay attention to whether the company’s products are in Phase II programs. Phase II studies or programs already refer to clinical trials for that drug or medical procedure.
The more products in Phase II a biotech company has, the higher the chances of their products getting approved. The chances of getting clearance to sell and market their own drugs and products also increase.
5 Biotech Stocks to Watch
1. Vertex Pharmaceuticals, Inc.
Vertex Pharmaceuticals, Inc. (VRTX) is a biotech company that specializes in rational drug design. It has three research facilities located in the U.S. and U.K.
Rational drug design deviates from the usual combinatorial chemistry. Combinatorial chemistry found is prevalent in most manufacturers of drugs and medicine.
VRTX is relatively old at 30 years compared to most biotech stocks present. That age shows experienced leadership and time-forged networks, which can add value to their operations.
Both their fundamental business operations as well as ongoing research and development projects fueled its growth.
For its pipeline, VRTX already has four of seven medicines approved for Cystic Fibrosis. This disease is a relatively lethal and life-long disease.
Currently, the company has around eight more pipeline products undergoing phase II clinical studies. These products are in different fields like pain medication and Hemoglobinopathies.
As of December 12, 2019, VRTX’s market cap is at $56.7 billion, with a revenue of $3 billion in 2018.
2. Alexion Pharmaceuticals, Inc.
Alexion Pharmaceuticals, Inc. (ALXN) follows Vertex Pharmaceuticals with its focus on rare diseases. Their target market is generally ignored by the established Blue-Chip pharmaceutical companies. In a sense, Alexion Pharmaceuticals found a considerably profitable niche.
This biotech company focuses on immune system research as well as autoimmune diseases. Their main pipeline product is Soliris, which is a medicine that many patients use for various rare disorders.
As of December 12, 2019, Alexion Pharmaceuticals has a market cap of $24.8 billion.
This biotech company is also researching more medicines for rare autoimmune diseases. With Soliris providing a major part of the revenue, ALXN features a stable bottom line and possible profitable opportunities treating autoimmune diseases.
3. Celgene Corp.
Celgene Corp. (CELG) has a higher and broader subject matter for research compared to both Vertex Pharmaceuticals and Alexion Pharmaceuticals.
Specializing in treatment for cancer and inflammatory disorders and diseases, Celgene has one of the highest revenues in the biotechnology industry within this list. Clocking in at $15 billion for the 2018 tax year, CELG has a market cap of $77 billion as of December 12, 2019.
Another interesting development for this biotech company lies with its subsidiary, Celgene Cellular Therapeutics. This subsidiary is a public Cord Blood Bank, which can provide additional diversified revenue.
In January 2019, Pharmaceutical giant Bristol-Myers Squibb acquired Celgene. This acquisition can offer additional growth for both companies in 2020.
4. Seattle Genetics, Inc.
While Seattle Genetics, Inc. (SGEN) has the lowest market cap on this list, it’s also the youngest. SGEN showed its ambition early when it acquired Cascadian Therapeutics for $614 million in January 2018.
Seattle Genetics, like Celgene, focuses on cancer treatments. This biotech company uses a different technique both in developing its pipeline products as well as the specific biological action and effect given by their medicines.
The company has a market cap of $19 billion as of December 12, 2019. The company reported revenues of $654 million in 2018.
Investors can see the pattern of the high-risk high-reward play by the company.
The company uses innovative and novel ways to treat cancer.
5. Incyte Corporation
Incyte Corporation (INCY) is a relatively new biotechnology company. INCY specializes in research and development of drugs for arthritis and cancer.
Strategically, Incyte can cater to the broad market of people who have arthritis. INCY also sells to the smaller but more expensive cancer and other rare diseases market.
Specifically, Incyte develops medicine for Chronic Graft-Versus-Host Disease. This is a rare disease that affects fewer than 20,000 people each year.
Some investors may find the company’s diversified target markets an attractive quality for investing.
As of December 12, 2019, INCY has a market cap of $20 billion and a stable market for its pipeline medical products.
I hope this guide on investing in biotechnology stocks has helped you learn more about investing in this sector.
Do you have any questions about investing in biotechnology? What are your thoughts about this industry? Let us know in the comments section below.