In this article, we are going to help you understand everything there is about biotech companies ranging from what they are- all the way to- how to invest in biotech stocks. This will help you hit the nail on the head with the trend analysis and strategically make investments in this type of stock.

Biotech stocks have been in the public’s portfolio right since the inception of the stock market and exchange platforms. But just like the recent surge in Green Energy stocks, EV stocks, and Crypto stocks, we are seeing a new rise and shift in the Biotech stocks’ popularity.

This both excites the investors as well as creates curiosity over what actually is prompting the rise in biotech company stocks and biotech stock prices. This curiosity is essential for looking into the reasons why the Biotech stocks are trending and analyzing the patterns which are making this type of stock boom. This gives investors and stock analysts an edge in predicting and identifying signals and hints in the market shifts due to internal and external reasons.

What are biotech stocks?

Biotech Stocks are essentially publicly traded companies that focus on the development, production, and commercialization of pharmaceutical products and services that are used in the treatment of diseases. The therapeutics and treatments that you consume or apply in daily life, acquiring from pharmacies or hospital dispensaries exist because a Biotech company developed them.

From a stock perspective, the biotech stock value ranges from triple-digit share prices all the way to under $1 price per share. The ones that are under $5 share prices are known as biotech penny stocks. These, just like every other penny stock are attributed to a lot of volatility however Biotech stocks have their own intrinsic share of volatility and risks (which come along with rewarding outcomes as well). Before we get into that let us first explain what really is creating the hype in this kind of stock, in the first place.

How Biotech Industry became very popular among investors

We mentioned before that the trend in the biotech stock is growing as it is in Green energy, Crypto, and EV stocks. But the reason behind this trend is completely different and associated to unique factors.

Covid-19 Pandemic

One major reason for the rise is the COVID-19 pandemic, specifically the race for vaccine production. When the pandemic had gripped the world in its virus, it had paralyzed many markets and business; the overall global economy was halted. In fact, even the most successful biotech companies had been forced to shut down. But Pandemic being human health and medical crisis had prompted responses from the very biotech industry that it had halted. The Biotech industry decided to push for solutions to the Pandemic and the virus, in the form of Vaccines. The vaccines became a huge market space in the healthcare industry and biotech stocks immediately started filling it up.

The aging population

According to the Rural Health Information Hub, The US population has more than 46 million citizens above or at the age of 65 which is expected to grow to 90 million almost in 2050. Every one in five Americans will be aged over 65 years old. The context of this is important when you correlate the use of prescribed medicines and drugs with old age; the older population uses prescribed medicines and drugs more often to treat their chronic illnesses and complications, as compared to younger generations. This means demand and innovation required from the Biotech Companies will increment in the following years and push the companies to focus on targeting innovative and niche spaces in the pharmaceutical market as competition concentrate between biotech companies.

Exposure to Biotech stock

The former factor is a more prevalent cause of exposure in the biotech market in the current market trend than the latter because the US and the overall world economy is slowly coming out of the Pandemic and rolling out vaccines. The pandemic had crippled many portfolios for the investors in various stocks and companies. During this time, the biotech stock was prevailing due to public, government, and private investors nudging the biotech companies to create vaccinations. This made investment profiles in the Biotech stock especially the ones in the vaccination race, more attractive.

What are the types of Biotech Stocks?

Now that we have established the roots of the developing trend in the Biotech industry, let’s focus on what exactly are the cues to look for when you are investing in the Biotech companies stock.

There are three main types of Biotechnology companies; Medical, Agriculture, and industrial ( or referred to as Red, Green, and White respectively).

The primary thing to focus on when you invest in Biotech companies is to have a bird’s eye view of all the metric and indicator for the stages and process that are related to Biotech stock’s operations/performances. This helps ensure, that your investment decision is based on solid evidence that can hopefully turn out to be incredibly rewarding.

Biotech operations and drug development, especially in the Medical type, goes through rigorous testing that are subject to stringent approvals and regulatory standards. These operations, based on the development and approval are broken down into 5 stages.

Investment and the five stages of Biotech Stock operations

The first stage of drug development is known as Research and Discovery, where concepts and theories of new products are formed along with a given conceptual framework to back up the attributes and potential of the new product.

The second stage is known as Preclinical Stage, where the drug’s pharmacological profile is created to assess the strategies and planning of human testing and effects that are expected to result from the early and late clinical stages. This profile is assessed by the regulatory bodies like the US FDA, to be approved and taken to the next stage human trials and tests. These trials and tests take place in 4 phases;

• Phase 1: The safety of the drug is evaluated in human trials with determination to predict dosage range.
• Phase 2: The efficacy of the drug is tested relevant to the disease it is targeting. This phase is known as proof of concept (PoC).
• Phase 3: The proof of concept and previous phases are tested again in large population batches with several thousand people. This phase is known as regulatory proof which when approved requires the next step of New Drug Application (NDA) approval in order for the drug to be marketed.
• Phase 4: Once the drug is marketed, the companies voluntarily or as per the requirement of the FDA will undertake post approval studies to validate and add additional information about the drug’s safety and efficacy.

The third stage is known as Early-clinical stage in which the companies start initiating the phases of the testing and study. The first two phases mentioned above are what comes into this stage of Biotech companies. These companies that are in the first two phases are known as Early-stage biotech companies.

The fourth stage is known as the late-clinical stage and the company is known as late-stage biotech. This stage consists of the regulatory approvals and NDA signing of the drug from the FDA.

The fifth and final stage is the Commercial Stage, in which the companies have been approved for the NDA and begin rolling out the commercial strategies for the market. This stage also includes Phase 4 study as per requirement or voluntary basis.

How to Invest in Biotech Stocks

It may click to you up till this point that the biotechnology companies out there are in different stages of the Biotech lifecycle and thus have different risks associated with each stage for investment. The more progressed and approved the company is, in its stages, the more profitable and attractive its stock looks- however it still remains risky. Biotech Industry Organization (BIO) researched that the likelihood of success and regulatory approval to be received for a company from Phase I to Commercial stage has been 9.6% from data stretching 2006-2015. However, in the 2011-2020 data study, it was reduced to 7.9% which is mainly attributed to the concentration and new entrants in the market.

The report also showed that even the hottest areas of a biotech investment portfolio which are Neurology, Cardiovascular, and Oncology have an approval rate of 8.4%, 6.6%, and 5.5% respectively. This report was also discussed by the Motley Fools team on their Youtube Channel in which they broke down the approval and success rating according to phases 1 to 4 (Commercialization), which was 70%, 33%, 30%, and less than 10% respectively.

Failure is the big bad wolf in the biotech stock investment

The investors need to lookout for the stage that the companies are in, in order to assess if the Biotechnology Company is worth investing into. Furthermore, it is important to heed for investors that companies can fail at any one of these stages which is what makes Biotech stocks volatile and risky. However, while looking into the track record of previous drug approvals of the company as well as the financials of the company, you can make a strong investment. The opposite is also true, once the company has been approved for any one of these stages and progresses, the stock price shoots up to double and triple digit percentages, while in some cases it can shoot up to quadruple digit percentages!

Other proven ways to invest in Biotech Stock

Looking at one biotech company’s stock for investment may seem to be tricky sometime, if there aren’t enough indicators to decide if the stock is valuable or not. In cases like these, especially if you are a new investor looking for exposure into the Biotech Industry, the safest bet is to opt for Exchange Traded Funds (ETFs) for biotechnology stocks. Biotech ETFs provide a great space for a new investor to get an exposure into Biotech stocks. Depending on your curiosity and preference you may opt for an equal-holding weight ETF or a market weighted ETF. The former will give you equal exposure to small new biotech stocks as you would get from big blue chip Biotech stocks.

Another great strategy that has been evolving in the Biotech stock investment is the focus on Contract Research Organizations. Many Biotech stocks discover an idea for their drug candidate and then proceed to outsource the administrative, regulatory, experimentation, and clinical procedures to a CRO which is well equipped for exactly this sort of specialization in the Biotech space. These CROs generate revenue for their services despite the approval or disapproval of the product in any of the stages. Furthermore, big-fish CROs focus on the M&A action where they realize the potential of a new product candidate for which it merges, acquires or partners with the product’s Biotech company and reaps the gains from owning the candidate through its development and approvals. Therefore, investing in Biotech CROs may prove to be a better investment than just the developing Biotech Companies.

Biotech Penny Stocks under $1

A great way to start exposing yourself to Biotech stocks is to find biotech penny stocks which are $1 or under. Usually, investors invest in multiple under $1 portfolios to broaden their exposure. Here is a list of Biotech Penny stocks under $1.

Biotech Stocks under $5

Similarly, if you want to upgrade your investment portfolio from $1 biotech stocks, investors opt for bigger share price and market cap range for their portfolio and as such, focus on $5 or under Biotech stocks to invest in. This adds slightly more reward and risk but still provides great exposure.