Saturday, April 2, 2011

What you should know before buying biotech and or pharmaceutical company stock

The mere words biotechnology and pharmaceuticals may make people think of brilliant scientists concocting the next great miracle drug, but what about investing in their companies? What should you know about investing in these cutting edge companies before you put even a cent of your money into them hoping for that giant payoff? Below, we will discuss the basics of the pharmaceutical and biotechnology industries, as well as discuss some of the prominent companies to invest in. Before that however, the following article will outline what you need to take into consideration before you take the leap and throw your hard earned dollars at these companies, instead of spending your money else where where you could potentially earn more.

First, let us provide you some background definitions to help you better understand the nature of these industries:
“The pharmaceutical industry develops, produces, and markets drugs licensed for use as medications.[1] Pharmaceutical companies can deal in generic and/or brand medications. They are subject to a variety of laws and regulations regarding the patenting, testing and marketing of drugs.”

“A “biotechnology company” is a company whose products or services primarily use biotechnology methods for their production, design or delivery.”

Who will come up with the cure for aids, cancer, or even diabetes? Wouldn’t it be neat to invest in companies and help them come up with a cure for the masses, while getting rich at the same time? The truth is, it may sound more appealing than it really is. You may be better off simply donating your money to help – because the financial picture shows it’s downright risky business. Even if their idea and science is the best ever, it doesn’t mean the company has the necessary resources and or money to bring their product to market and effectively sell it.

You see ads everyday, for cures like erectile dysfunction to insomnia, and the list continues to grow to even include cures for your pets depression (what, you didn’t know dogs could be depressed?). Before long, there may be a pill for every ailment out there (many argue there already is something for everything). But can you effectively finance their company and or product development without them going broke first (after the company is forced to jump through various hurdles including FDA trials and the likes)?

Understanding the complexity of bringing drugs to market is only one piece of the puzzle. Many investments in biotech and pharma are an exercise in waiting. Wait before you exclaim that you can wait. There is an opportunity cost in that there are many other investment opportunities out there that you can spend your money on which may be less risky and even offer better returns.

How about this stat to squash some of your enthusiasm…

“Only one in ten biotechnology companies were considered profitable in mid-2005.”

Now that’s scary if you ask me. Why would you dump money into something that was shown to have a success rate of 10%? Certainly there has to be better opportunities out there.

That doesn’t mean however, that there aren’t excellent pharmaceutical and or biotechnology companies to invest in , it’s just a stat to help you see that there are significant barriers for these start-up companies – and you should use major caution before investing in them. Below, we will discuss what to look for if you are leaning towards including one of these types of companies in your diversified investment portfolio and which companies are doing well in this area now (not that chasing past performance is a good idea, but it’s start into understanding these markets).

Before we even get started, let us lay a foundation or background so you can understand most recently what pressures have been on these companies and their stock prices. With the new administration in the White House, healthcare companies in general have seen their future earnings expectations to slow – as the Obama administration has focused their attention on subsidizing the entire industry. This is a massive shift, whether you agree with it or not, on the outlook of this once overly profitable industry. The caveat being, this is not necessarily a crushing blow to these markets as the entire US age shift continues to push more and more people into retirement age and its associated health care maintenance. In a nutshell, even though profits may be lowered, there are going to be a ton more people needing health care services as the general population ages.

What to look for you’re asking? As always, look for companies with a stable and smart management team. Good leaders can do amazing things when they are given the chance, especially look for a management team with a scientific background, which will poise them with a competitive advantage over their peer companies.

However, without the long term financial support, even the best management team cannot operate. Look for companies with a solid balance sheet, meaning look for companies with relatively low debt and significant cash on hand to weather longer than expected clinical trials and such. It helps as well if the company has various products rather than one or two – so when something goes wrong they to have a diversified portfolio to help them combat the cyclical nature of their profit models.

Not to mention, look for companies with products that can be taken to market in a relatively short time compares to their peers. The faster to market, the faster to put the money in their pockets and yours.

The following is a list of several profitable biotech and or big pharma companies that you could start looking at to get an idea of what it takes to be successful in the industry. If your prospect compares well to one of these guys, you may have just found the right gem for your portfolio – but be leery as you know – things may not be as kosher as believed. Following the list we will wrap up this article with a last tidbit of advice.

big pharma and biotech


To wrap things up, an interesting article over at Morningstar highlighted the feelings of a few top global fund managers, 2 out of 3 agreed to steer away from these risky stocks. Just because it sounds good, even for humanity, it may not make sense for your finances.

Be certain to check out our broker reviews and lessons if you’re interested in starting your own portfolio.


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