Three Important Things to Keep in Mind When Investing in Biotechnology Stocks

Three Important Things to Keep in Mind When Investing in Biotechnology Stocks

By Vineet

Biotechnology stock prices always spring to view when you think about elevated risks and a higher possibility of positive returns. The biotechnology sector has a reputation for resting its business on the results of clinical studies. Thus, a favorable clinical result or news can help to boost the biotechnology stock prices. On the other hand, a bad result might send the company's stock prices plummeting downwards. As a result, it's really unsurprising that the majority of COVID-19 vaccine development firms have performed well during the last year, with all eyes on the success of the drug. Biotech companies are in a high-risk, high-reward environment, where companies with positive results for their vaccines have flourished, whereas the companies with negative results are struggling.

Biotechnology stock prices are volatile and risky. However, at the same time, they may be an excellent addition to your portfolio to give you a boost in terms of economic prospects. Unlike larger pharmaceutical businesses, biotechnology firms seldom have substantial commercial sales volume, making them difficult to assess. Nevertheless, one of the finest – and worst – aspects of such assets is that depending on the effectiveness of the drugs; the biotechnology stock prices may shoot up or drop by up to 50% overnight.


Things to Keep in Mind When Investing in Biotech Stocks

Investing in biotechnology stocks can be quite tricky, especially for those with limited knowledge of the industry. Therefore, it is important to spend time researching the company and the drugs they are developing and understand their probability of getting approved by the FDA.


Here are a few things that you should keep in mind when investing in Biotechnology stock prices:


Diversification is Key

Improper diversification may be the most damaging blunder new investors make when purchasing biotech shares. Therefore, it's crucial to mitigate the risks by dispersing your investments among multiple businesses, particularly when participating in the initial stages of drug development. Distributing your money out assures even if one of the firms does indeed have a bad quarter due to clinic failures or a lower-than-expected earnings announcement, your entire investment will not be wiped out.

Diversifying your stocks also implies that whenever your shares perform well, they won't have as much of an impact on the entire worth of your asset. As a result, you can transfer a percentage of your earnings to retain your shares appropriately, decreasing the influence of everyday price volatility.

Diversifying doesn't have to be complicated: rather than just one biotechnology firm, investing in a cluster of two or three can lower the risk significantly. Admittedly, you'll have to do some study to identify the probable candidates, but in the long run, your investment will be a lot more stable.


Understanding the Influential Factors

Often biotech companies generate income by collaborating with bigger corporations until they get their own products on the shelf. Usually, smaller businesses would accept licensed products, offer medical research prospects, or collaborate on a new product with their backers. However, the money from such agreements is typically insignificant in relation to the firm's R&D costs. As a result, the growth may not appear substantial to the company's biotechnology stock prices.

However, a partnership is about much more than just income. In reality, having a large company to help them with the clinical trials — or vice versa — can be quite beneficial to both the biotech companies. For Instance, Pfizer's administration has highlighted that their collaboration with BioNTech to produce a COVID-19 vaccine has resulted in additional technological knowledge from the partnership. Furthermore, the parameters of partnerships can frequently fluctuate, providing investors with an inside view of how much the two sides intend their joint endeavor to progress.


For Instance: let us examine the consequences of a big corporation such as Vertex Pharmaceuticals (NASDAQ: VRTX) increasing its stake in a collaborative therapeutic research initiative with CRISPR Therapeutics (NASDAQ: CRSP), as it did a few months ago. Vertex expressed its high level of trust in the CTX001 genetic engineering initiative by purchasing controlling interest, although it previously only had a 50% stake. On the other hand, CRISPR's ability to let go of its equal ratio in the initiative indicates that its leadership believes it can earn a greater return, particularly given Vertex's $900 million payouts for majority ownership.  


Success isn’t Solely Dependent on Clinical Results

According to the FDA, a mere 13.8 percent of medications and new drugs get it through the complete clinical trial phase before receiving government approval for marketing. The BIO trade organization, which represents biotechnology businesses, is much more dismal, estimating that only 9.6% of drugs make it all the way past phase 1 testing to clearance. The idea herein isn't to scare investors from investing in biotech companies; instead, it's also to emphasize how tough it is to produce a new drug. No matter the situation, drug success isn't assured, and you must not engage in a firm based on that assumption.

Experimental issues arise perhaps even in the finest corporations. The majority of failures occur in second phase clinical studies, in which there is a 30.7 percent chance of progressing to the next stage. So it's no surprise that biotechs must demonstrate that their treatments are genuinely beneficial to patients in the phase 2 trial in order to get approval.

Political influence and financial capital play a key role in evaluating the Biotechnology stock prices of any firm. Investors should start small while investing in this industry. As you understand the company you are invested in and learn more about their future plans, you can gradually increase your investments. One of the most important things to keep in mind while investing in biotech stocks is always being on top of the news. Opportunism and wise decision-making are key to making enormous profits in the biotechnology stock market.