Biotech Investing – The Risks of Putting Your Money in Biotechnology

August 1, 2008

I spent the last post talking about stable biotech investments. The majority of these investments are in the pharmaceutical sector. In general, stable biotech investments are few and far between, as biotech investing is seen as one of the more risky investment strategies available. Fact is, many biotech firms fail: they fall quickly and fall hard. The flipside is that there is also a huge potential in biotech investment, but if you don’t have a fallback plan with other types of investments, don’t be surprised if you lose a mint.

What makes biotechnology such a risky investment is that the investor has to know how to read scientific reports. It’s not enough to read sales reports – for new biotech opportunities, these may not even be available. The trick is to not get too excited too quickly when you see that a drug or scientific discovery has passed a hurdle, such as a successful clinical trial. It can take the talents of statistician to understand a clinical trial: how many people are represented in the trial, what age, what gender, etc. Even a good sample size does not necessarily guarantee that a product is going to sell well or even work effectively.

If the stock market falls overall, you can expect biotech to fall even lower: it’s just that volatile. Also, it’s expensive to run a biotech company. Clinical trials cost a fair sum, so if the biotech company is testing out something new – and doesn’t have another high-performing product – the company’s going to take a major hit: and so are you. Though there’s a higher payout for stocks that aren’t rich with other investors, you are in greater danger of taking a fall. So riskier stocks are those companies that don’t have a diversified product base.

The Riskiest Biotech Investments

They say, “You can’t rush art.” Well, you can’t rush science either, so if you are an impatient investor who likes a simple form of investment, biotech is not the way to go. Some forms of biotech are wide open with limitless possibilities, but also seem to take forever to enter the mainstream. How long have we heard about “virtual reality” but there is no mainstream application of this technology. The same goes for something like Nanotechnology. It’s a hugely open field, but also in its infancy. You’re likely not going to see a return on your investment by next Wednesday. As fast as the world of technology moves, some investments could take decades to materialize, albeit for a whole lot of money.

Another shaky investment possibility is genetically modified food. Though the industry touts genetic engineering as potentially a way to solve world hunger, there is a limited – and dwindling – consumer base for these types of products. Put simply, there’s a backlash against GMO’s, as people become more health-conscious and more concerned about the safety of GMO’s.

Genetically-engineered medications are also problematic. Though they have great potential and the possibility of cutting down on clinical trials, the reality is that it can take 10 to 15 years for a genetically modified drug to gain FDA approval. Gene therapy has not yet panned out as a stable money-maker after being heralded as a revolution in medical biotechnology. Many gene therapies replace current drugs with a differing list of side effects, which has cut into their earning potential.

The trouble with biotech is that you cannot begin to predict how a new advancement will perform. So while in this day and age, green technologies offer great possibilities, there is the prospect that one green product will succeed and another will fail. This is true for every wing of biotech: pharmaceutical, agricultural, environmental, and so on. Not all biotech investments have the long-term prospects of nanotech. Some are plenty volatile in the short-term.

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Henry is a financial writer living in Los Angeles. He's written about most any financial topic under the sun. He also writes some fiction, but rarely about the world of finance. Go figure. He's also been known to write a song or two - but he doesn't write songs about personal finance either. There aren't too many catchy songs about the stock market. Though maybe it's a niche market worth exploring...

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