Why should investors be interested in the biotech market?
As the biotech industry continues to reach new heights, Maxim Manturov, Head of Investment Research at Freedom Finance Europe, explores the market and outlines why investors should start to take interest in it.
Some scientists believe we are in the golden age of biotechnology. Ideas that many used to believe would only be possible in science fiction has now become a reality thanks to biotech companies. Scientific advancements have created new ways to treat and prevent diseases that were previously totally inconceivable. It’s this continuing growth and advancements in the sector that provides investors with tremendous opportunities. Many biotech stocks have very good potential, but before investing it’s important to understand the industry.
Biotechnology takes four major steps in the drug development:
1. Drug discovery: Biotechnology helps to identify drug candidates that new or existing therapy areas can potentially target.
2. Preclinical tests: The drug candidates are tested in vitro (in test tubes) and/or in vivo (against live animals, such as mice), and/or ex vivo assays (using measurements of tissue properties).
3. Clinical trials: If successful the drug candidates will pass all IV phases of the clinical trials process.
4. Approval by regulatory authorities: The company applies for authorisation and marketing approval from the corresponding medicines licensing agency depending on geographical location.
Clinical trials usually include four phases:
Phase I: Small-scaled studies aimed at finding a safe dose of a candidate drug and determining how it affects people.
Phase II: Studies that include up to 100 patients and focus on safety, short term side effects, and optimal drug dosage.
Phase III: These trials compare new treatments with the best currently available treatment, and focus on the quality of life and continued side effects of the drug.
Phase IV: Phase IV trials are completed after the drug has received its licence and aims to uncover long-term risks, whilst monitoring the drug on a larger scale.
A drug candidate must successfully pass each phase in order to progress to the next one. After the drug successfully passes phase III trials, and demonstrates safety and efficiency in treating the target disease, the company will apply for regulatory approval using clinical trial data. Investors should keep a close eye on which phase the companies drug candidate is progressing through, as the later the phase, the more potential the company has in that therapeutic area. This is also a good indication of how likely the drug is to be approved and reach a licensing authorisation. A biotech company with more experimental drugs under development will generally have less risks than one that only has a single, or few candidate drugs.
Financial performance plays a role as well. Most biotech companies do not profit until one or more of the drugs are released into the market. This means they require a significant amount of cash flow to fund operations and the necessary licencing applications for their potential drug candidates. These companies often issue new shares to raise the necessary cash, which lowers the value of the existing shares. Some biotech companies also receive money through partnerships with larger drug manufacturers and grants from government agencies and non-profit organizations. Besides, any of the most promising biotech companies can be acquired by a larger drug manufacturer.
Why may investors be interested in biotechnology?
With biotechnology, there are various options to enter the market. First of all, one may buy stocks, which could bring large returns, but also high risks both in the midterm and in the long term. Other options include ETFs, which have stocks, commodities, and bonds. ETFs offer an extra layer of protection and are in line with well-known biotech market indices.
Biotech profits: Biotech companies can sell their research to other new or existing companies and still continue working with it; either way, they have a significant impact on capital gains. For investors, buying early and waiting for the drug discovery to move closer to the market may bring profits. The biotech industry is growing with the payout types, various drug research results, and the rising demand for health products. Overall, investment in biotechnology generated over 14% per annum over the past decade and still has some room for growth.
External factors: The world’s population is aging, and this increases the need for new therapies to address emerging health problems. Having a large percentage of the population requiring life-enhancing drug treatment is good news for the biotech industry, and an opportunity for those who invest in biotech companies looking for a good return on their investment. Overall, the biotech industry is in high demand and could well be so for a few decades to come.