In the midst of COVID-19, investors have their eyes on stocks for biotech companies.
The holy grail of 2020 is the prospective COVID-19 vaccine.
Social distancing, business shutdowns, and other lockdown measures are (hopefully) temporary measures, but an effective treatment and/or prevention of the coronavirus could help the world go back to normal.
The pursuit of a vaccine has put an intense focus on U.S.-listed biotechnology companies this year. According to data that the Wall Street Journal compiled from Dealogic, the total value of biotech IPOs has risen to nearly $10 billion as of Aug. 7. (The previous high from 2018 was at $4 billion.)
The first biotech firm whose research leads to an effective COVID-19 vaccine could reap substantial financial rewards — as would its investors. Yet from a profit-only standpoint, investing in biotech companies also carries significant risk.
THE FINANCE OF SCIENCE
The biotechnology industry focuses on developing technology to improve life, from agriculture to medical advances. Medical biotechnology specializes in developing drugs and clinical research for diseases and other medical conditions.
Since the first biotech company that went public in 1980, the industry has grown to hundreds of companies that research drugs, medical devices, diagnostics, and more.
While some of these companies receive varying amounts of government funding, the funding for companies on the U.S. securities exchanges is subject to investor confidence. And though these companies’ research can take years to pay off (if at all), they face the more immediate consequences of news announcements and approval from the Food and Drug Administration (FDA).
THE BUZZ OF SCIENTIFIC BREAKTHROUGHS
Some companies in the biotechnology sector have the potential to go from a tiny market capitalization to a multimillion-dollar value seemingly overnight. Biotech companies whose research leads to an effective vaccine, rehabilitation, or other medical breakthrough can create instantaneous demand, especially if there is little to no competition in the market.
Many investors are enticed by inspirational marketing from biotech firms, eager to invest in revolutionary ideas that promise to cure disease or resolve medical mysteries.
Besides supporting companies with benevolent goals, those investors may be hoping to invest early in a company that will see skyrocketing profits. Unfortunately, with those high rewards come potentially high risks.
The normal profit cycle in the stock market generally doesn’t reward the longer research and development timetable required for these scientific breakthroughs (though the new Long-Term Stock Exchange may mitigate that). In fact, the trade organization Biotechnology Innovation Organization estimates that 92 percent of biopharmaceutical companies are unprofitable at any given time.
The initial discovery of a potential new molecule or approach to the pre-clinical and clinical programs, as well as the FDA regulatory and approval processes, can take 10 to 15 years on average. This means that some biotech companies can burn through hundreds of millions of dollars with nothing to show for it.
Normally, researching a firm involves reviewing its products and services; however, investors researching a biotech company may feel like they need a doctorate degree to understand its mission.
Still, investors can study other facets of the company. Reviewing how many products are in the pipeline of clinical trials and the stability of the firm’s financing may prove to be more helpful for investors.
BIOTECH’S BOTTOM LINE
Investing in biotech companies relies on your comfort with financial risk, as the long wait for a payoff (if there is one) can be stressful. By the same token, it could be worthwhile to you if you prioritize value-based investing over strict profit, provided you have researched the companies and feel confident in their value.
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