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The Scientific Method To Investing In Biotech

14 October 2009 No Comment

The field of biotechnology is full of innovation, discovery, and ideas. Rigorous scientific guidelines and standards govern the large body of research that is carried out globally. But investing in biotechnology is a different story. The conditions aren’t always as logical. The biotech sector is notorious for high risk, which can mean big rewards or big losses. This is why your approach to investing in biotechnology must have a more scientific method.

The Question

Biotechnology? Biotechnology is sort of a catch all term for a sector of the market that includes companies that use biological science to develop advancements or drugs, particularly for the medical community. The concept is exciting. Your investing in companies that use cutting edge technology to essentially save lives or promote wellness. But it’s not that easy. These companies are held to strict rules and regulations, which is great for our health, but can be cumbersome for investors. It usually takes a company about 7 years to progress a drug from the discovery to the market. Most companies develop “pipelines” which consist of drugs in the process of FDA approval. These drugs must pass through 3 phases of meticulous clinical trials before they can reach approval status. The details of a biotech company’s pipeline is usually available on the company’s website.

The Hypothesis

The next step in the method is to come up with a “hypothesis” of a biotech company that you anticipate is on the rise. This is much easier said than done. Having a general medical background, or a close friend with a background, can be helpful in sifting through the wealth of information that is available in biotechnology. Look for companies with a couple potentially valuable drugs in their pipeline in case one of them fails in trials. Also look for drugs that if developed could serve a large market of patients. The general valuation rules of a stock do still apply, but be aware that sometimes a biotech company will operate for years in the red before a drug can get to market and generate sustainable profits. Biotech companies are notorious for volatility that is very news-dependent. For example, earlier in the year I invested in Human Growth Sciences primarily because of a potential drug that would combat systemic lupus. In July, the stock quadrupled on positive feedback from a phase 3 clinical trial for the drug. But this is just a success story, and know that a negative news report could fuel a massive sell-off just as easily.

The Procedure

Once you have done your research, its time to put it to the test, and carry out an investment. As always, make sure you enter and stick to an investment strategy. If your investing in a company that is expecting phase 3 clinical trial results for a promising new drug in January, don’t panic from a slight downturn in November. You can hedge some of the risk from small-cap biotechs by investing in larger, less volatile, pharmaceutical companies like GlaxoSmithKline (GSK) or Amgen (AMGN), which occasionally acquire smaller outfits.

Conclusion

Biotech investing can be risky business, but your 20’s are a great time to take a little risk. Just don’t starve yourself on macaroni & cheese to put money into a small-cap biotech company. No matter what happens politically with healthcare, it is certain there will be a continuous boom in the industry as the baby boomers reach senior citizen status. Investing in anything is a learning process. Take notes on reasons an investment went wrong or went right. Take a lesson from the scientists that work daily to save our lives, and bring some method to your investing madness.

A regular contributor to 20smoney.com, John is a 20-something that resides in Orlando, FL with aspirations in writing, entrepreneurship and investing.

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