The following is a modified version of an article written by Karl Thiel and originally published in the June 2010 issue of Motley Fool Rule Breakers.
Investors are usually hot on biotech -- or not. Many love the sector and fill their portfolios with more exposure to genes and proteins than they should. Other investors avoid biotechs, citing a lack of scientific knowledge. The learning curve is too steep, they say, and the science just too arcane.
If you're in that latter group, you should reconsider your position. You don't need to be a scientist to be a successful biotech investor; you don't even need a particularly deep understanding of science. What you really need to know -- how drugs proceed through development and approval, how to interpret clinical and preclinical results, how to weigh the market and a product's competitive potential -- isn't any harder to learn than the shibboleths of other industries. In fact, if you have a grasp on statistics, I'd say you're better equipped than the average lab rat to size up a biotech investment opportunity.
Let's start with this question: Why should you invest in biotech?
Here at Rule Breakers, we think that with each new investment you make, you should ask yourself, Do I like what this company does, and will it be fun to follow? Well, nonbelievers, I'm here to suggest that there's a lot to like in biotech, as well as plenty of fun to be had.
First, it helps to believe in what the company is doing. That goes for any investment, but it's easy for biotech -- the industry is dedicated to improving human health and wellness. What's not to like about that?
For many people, though, an interest in the industry begins with a more personal experience. Do you know someone with hepatitis C? If so, you can recognize the tremendous benefit that Vertex Pharmaceuticals'
If you have experience dealing with a disease and have talked with doctors who see it frequently -- maybe you've even seen an experimental medication in action -- you have an edge over most investors. Personal experience is not a prerequisite to successful investing in biotech, but it does give some investors the incentive to overcome those initial hurdles and immerse themselves in the sector.
As far as fun goes, disease sure isn't. But advancing our understanding of disease can be thrilling, and so can biotech's investment returns. Some of the biggest winners on the Rule Breakers scorecard have been in biotechnology or medical technology. Of course, it's only fair to mention that some of our worst performers have also come from the sector.
That's the other reason some investors shy away from biotech: They say it's too risky. I won't deny there are big risks involved. And because these companies fortunes' are often shaped by binary events, such as the outcome of a clinical trial or an FDA decision, a lot of stock movement becomes packed into a very short period. That can be fun for investors or it can be scary. The thing to keep in mind is that some companies will live or die by a single product, and others have deep pipelines and can withstand a disappointment or two.
Although biotechs present some challenges, they also offer rewards you won't find elsewhere.
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