From disease-resistant crops and innovative brewing techniques to genetic engineering and stem cell research, biotech covers anything that combines biology with technology. Recent breakthroughs in medical and pharmaceutical research—like the mRNA technology used to create vaccines for COVID-19—help to explain the booming interest in the sector, but biotech companies right across the spectrum hold exciting promise for investors.
Investing in biotech, however, comes with potential risk. With his focus on the healthcare industry in the UK and USA, Laidlaw CEO, Matthew Eitner explains why investors are showing such interest in the sector, and what they should be watching out for…
Reasons to invest in biotech
Biotech firms fulfil many of the criteria that investors are looking for when adding to their portfolio. First of all, the sector develops products where there is a clear demand, and for which there is a pressing need. Secondly—and relatedly—the market is booming. The companies behind some of the recent breakthroughs have benefited from enormous growth to revenue and profits. Pfizer, for example, as one of the key players in the development of COVID vaccines, reported growth in revenue of 92% for 2021, reaching $81.3bn compared with $41.7bn in 2020. Globally, the biotech market is predicted to hit a massive $2.44 trillion in 2028.
Biotech investments can also provide balance to portfolios. Large established firms can give some more predictable income, while at the other end of the risk/reward ratio, investors can look to smaller firms investigating cancer therapies and stem cell research, for instance. Furthermore, investments in biotech are likely to meet Environmental, Social and Governance (ESG) goals, as well as financial aims—they are an ethical choice, providing investors with the feel-good factor.
What to consider when investing
There are a vast number of biotech companies, many of which are strong candidates for investment. Some of these have successful drugs already on the market, while others have promising ones in development. The pandemic has also caused a surge in opportunities. So how do investors choose where to start?
The wider biotechnology market can be split into sub-sectors, often known by color: red (medical and human health), white (industrial), green (environmental and/or agricultural) and blue (marine) are the best known (although there are others, including yellow for nutrition and brown for desert technology). Each of these carries a different level of risk.
Green biotech is arguably one of the most exciting sectors, and is vital for our future, with companies exploring everything from disease-resistant plants to carbon-capture techniques. It also has one of the highest levels of risk because the sector is very unpredictable, and it can also take a long time to reap rewards. However, there are reasonable rewards to be made by those willing to wait, and therefore it is still attracting investment.
White biotech is not seeing as much interest from private investors as other sectors, perhaps due to the fact that developing enzymes and micro-organisms for industrial processes is a little less tangibl and more esoteric. However, the industry is creating many useful products and some larger companies are investing in white biotech startups—it is worth keeping an eye on.
While investing in biotech as a whole is a high-risk endeavor, the outlook for red biotech is excellent. Pharmaceuticals in particular can be a sound way to diversify a portfolio. Chronic diseases and associated healthcare costs are driving demand, and the development of new, innovative products is also contributing to a growth that is likely to continue year on year through to 2027.
The main way to invest in biotech may be through stocks, but one way to mitigate the risks associated with biotechnology is through investing in Exchange-Traded Funds (ETF). ETFs hold assets including stocks and commodities, and trade close to the net value of the assets. The sector’s biggest is the NASDAQ Biotechnology ETF, which tracks 370 different holdings. However, investors can also consider smaller ETFs.
Understanding Pharmaceutical Development
As much as a third of the total number of biotech products sold since 2000 were pharmaceuticals. It’s key that investors truly understand the way the industry operates, especially when it comes to drug development. There can also be a long wait for gains, as pharmaceutical firms have to put drugs through rigorous testing, and then wait for approval or feedback from the FDA or other relevant bodies. For this reason, it’s worth paying close attention to the FDA and considering how it may affect any drug candidates.
Investors should also look at how many drugs a pharmaceutical company has in development. Most firms will be developing multiple drugs simultaneously, and companies that have many products in the pipeline are naturally a much safer bet than those who are focused on one or two.
When making specific investment choices, it’s important to be aware of what stage each drug is at in its development. Development can be broken down into five stages, and with each stage the likelihood increases that a drug will be successful. The outlook is still very unpredictable at Stage 1 (drug discovery) and Stage 2 (pre-clinical testing). Stage 3 is clinical testing (subdivided into phases 1, 2 and 3), when a drug may be receiving more attention, Stage 4 is the all-important regulatory approval from relevant agencies including the FDA, and Stage 5 is post-market monitoring of the drug.
Weighing Up the Risk for an Exciting Investment
Investing in biotech can carry potential risk, but the red biotech sector is booming. Investors should, as with any investment, learn about the sector, before reviewing the financials and performance of any potential investment choice, as well as considering the company’s specific focus. The risk can be reduced by focusing on companies that are in a strong position financially.
Of course, investors need to decide the level of risk they are happy with, but the benefits of investing in biotech are clear. It’s an ethical choice—by investing in biotech, investors can rest assured they are helping the future of humanity. It can provide a better understanding of medicine and science, which may be intellectually rewarding for some. And above all, given the direction of the market at present, the right investments have the potential to make enormous profits.
ABOUT MATT EITNER
Matt Eitner, Laidlaw & Company CEO; an international investment bank based in New York City, expands equity positions in the healthcare sector and works alongside influential leaders who serve as directors of expanded teams. With a background in equity training, Eitner served as vice president of Casimir Capital and managing director of Aegis Capital Corp prior to his CEO position as Laidlaw.
