When it comes to industries that offer investors a higher than
average risk-versus-reward scenario, biotech investing arguably
takes the cake.
Since the benchmark
bottomed out in March 2009 the index has gained about 200%. In
SPDR S&P Biotech ETF
, including dividends, has risen more than 265% over the same
period. With gains of close to 800% from
, more than 500% from
, and a shade over 400% for
over the trailing 52 weeks, it's easy to see why biotech investing
lures in so many new investors
Of course, whereas this sector can create instant winners
overnight, it also has the potential to make hard-earned money
disappear in the blink of an eye. For instance, more than
one-quarter of all biotech stocks are down by at least 10% over the
trailing year despite a 20% gain in the S&P 500 over the
Biotech investing: It sounds easy, but ...
One of the big variables that creates this gap in performance is
that biotech investing relies on looking deep into the future more
so than any other industry. Biotech companies are usually valued
not for their revenue and profit/loss results from the prior
quarter (which may not even exist if it's a clinical-stage
biotech), a typical starting point for stock analysis with nearly
all other industries, but instead are assessed based on the size of
the patient pool their developing and existing drugs will treat, as
well as the forecasted peak annual sales potential of those
sounds so easy
, but there are so many people who are unsuccessful biotech
Three mistakes biotech investors make
Let's have a look at the three most common mistakes biotech
investors make so you don't fall into the same trap, because, as
these totals above show, if you do take advantage of the
opportunities that the biotech sector offers your reward could be
Mistake No. 1: Chasing
This mistake isn't confined just to the biotech sector, but the
habit of chasing penny stocks is among the easiest ways to lose
money investing in biotech stocks.
Inexperienced traders often forget that the price of a stock
isn't what matters -- the market cap does. However, their eyes
light up when they see a stock trading for just $1, $2, or $3 per
share because they believe its "low price" gives it a better chance
to double from its current level.
But stocks trading in the low single-digits are often there for
a reason. For biotech stocks that are wholly clinical in nature
that reason may require a little more digging, which is something
short-term traders usually don't have the patience to do. But rest
assured, a reason is almost always found.
as a perfect example. Amarin has one drug approved by the Food and
Drug Administration, Vascepa, for persons with really high
triglyceride levels. Amarin tried to get Vascepa's indications
expanded to cover a significantly larger portion of the population
(those with triglyceride levels of between 200 mg/DL and 499 mg/DL)
last year, but the FDA ultimately
rejected this move
. Though its share price below $2 may
tempting, especially considering that it's down by more than 65%
over the past year, it remains to be seen if Amarin can generate
the support from the FDA or the funds to eventually complete a
costly and lengthy cardiovascular outcomes trials. And even if
completed, investors have to wonder how many years it'd be before
Amarin has a real shot at turning a profit. While its share price
might give off a hint of undervaluation, the story behind the stock
would merit a wise biotech investor to keeping distance.
Penny stocks also commonly have concerns about cash burn and/or
dilution. When a biotech is in the clinical development stage it
tends to burn through its cash on hand. This means investors are
constantly wondering if their investment will have enough capital
to not only finish its trials, but to simply survive. In order to
maintain enough cash in the coffers to run its business many
biotech stocks will turn to share offerings which do raise cash,
but also come with the negative effect of diluting existing
Mistake No: 2: Allowing emotions to get the better of you.
Secondly, far too many biotech investors allow their emotions to
get the better of them, leaving them blinded to the
long-term-growth drivers that they should really be focused on.
A case in point here would be the weight control management
sector and biotech stocks like
. Both VIVUS and Arena have a faithful following of supporters --
just check the comments section of any Motley Fool article if you
need proof. Yet the overwhelming love for these stocks has left
many of their shareholders blindsided by hefty losses in each
stock. "Why?" you ask? Because investors were unwilling to believe
there could be another side to their investing thesis.
As we've learned now after watching VIVUS' weight-loss drug
Qsymia since it launched in 2012 and Arena/Eisai's Belviq since it
launched in 2013, the demand for weight-loss therapies so far
hasn't been that strong. Insurers have been slow to latch onto
coverage and consumers simply haven't been willing to pay much, if
at all, out of their own pocket to get their hands on these
fat-busting drugs. With the possibility of even more competition on
the horizon as a decision date from the FDA on
' Contrave nears, it would appear that the investing fervor
surrounding the sector may be for naught.
Mistake No. 3: Not seeking pipeline diversity.
Lastly, far too many novice biotech investors focus on companies
with very few existing drugs or that have just a handful of
compounds in development. By doing this, investors are giving
themselves only a limited chance of long-term success.
Allow me to use a baseball analogy to better describe this.
Imagine I asked you to hit a home run over the fence, but that you
only get one pitch with which to do so. Now, imagine I have 20
baseballs in a bucket and I said you have to hit a single home run
over the fence. In both scenarios you win if only one ball clears
the fence. Which would you rather choose?
If you said the latter you're thinking like a
true biotech investor
because you're spreading your risk around over a number of
developing and existing drugs. If a few developing compounds fail
to succeed in clinical studies then your downside risk is mitigated
by the fact there are more than a dozen other experimental
compounds that might succeed. In contrast, a pipeline with only one
or two drugs has the potential to blow up in biotech investors'
faces if things don't go according to plan.
You can only grow more knowledgeable
Keep in mind that even if you avoid these common investing mistakes
there are still no guarantees you'll succeed at biotech investing.
But I'd certainly suggest that your chances of success will have
gone way up by taking these points to heart.
If you think the biotech sector offers impressive growth
potential, wait until you see the opportunity behind this
revolutionary new technology.
The best biotech investors consistently reap gigantic profits by
recognizing true potential earlier and more accurately than
anyone else. Let me cut right to the chase. There is a product in
development that will revolutionize not just how we treat a
common chronic illness, but potentially the entire health
industry. Analysts are already licking their chops at the sales
potential. In order to outsmart Wall Street and realize
multi-bagger returns you will need The Motley Fool's new
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Biotech Investing: 3 Ways You're Doing It Wrong
originally appeared on Fool.com.
has no material interest in any companies mentioned in this
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