Biotechnology is an important, Rule Breaking industry that will likely change human life more than any other. Despite its potential, however, many investors shy away from investing in biotech because it is difficult to understand and it entails high risk. Different ways to invest in biotechnology do exist, though -- ways that lessen your risk and still offer you the potential reward.
Starting with our next paragraph, this column offers a framework for how you can think about the biotech industry by dividing it into various sectors in your mind. Doing this, you'll likely find ways to invest some long-term dollars in one or more parts of this promising, large field. We'll start with the risky guys.
To invest in these young companies, you need to know the companies very well and you need to focus on, among other things, the:
- Drug pipeline. Know what drugs the company is developing, the market size that they may serve, the competition, and what stage of development the drugs are in.
- Cash balances. Without cash to live on, these typically small revenue companies are in trouble.
- Research & Development. The companies must have substantial R&D budgets.
- Partnerships. Young biotech companies almost must have strong marketing and drug development partnerships in order to one day thrive.
Companies that emerged from the masses of biotech startups in the 1980s to become leaders include Amgen (which is analyzed regularly, including its pipeline, by Motley Fool Research), Biogen (Nasdaq: BGEN), Genentech (NYSE: DNA) and Medimmune (Nasdaq: MEDI). Medimmune is smaller than Amgen or Genentech, but it has six drugs on the market and it should top $1 billion in annual sales by 2001. Investing in established biotech leaders, like these and others, is a safer way to put your money to work in biotech. These companies, perhaps as much as any, stand to gain from new genomic discovery and reward shareholders as a result.
Four of these companies are worth more than $100 billion each, and the others are worth at least $70 billion each. These companies have the budgets and expertise to benefit from gene-based drug development either via acquisition or through their own research -- and most likely both. Pfizer is a monster of a way to invest long-term in biotechnology and the benefits that it will bring, and Pfizer presents very low long-term (decade or longer) risk. Arguably, so do Johnson & Johnson, Eli Lilly, and Merck (which are the ones I know best).
If you're betting on biotechnology to be a big winner overall at the end of the next two decades, but you don't know where to invest, consider spreading your money in a smart, low fee biotech fund. If you would like to suggest a biotech mutual fund by name, please post it on our biotech board, along with its annual fees and turnover ratio, if you know them.
A strong biotech mutual fund would likely get you invested in the following opportunities as well.
Related Investment Opportunities
Understanding these companies is a different matter than understanding a young drug-producing biotech. In bioinformatics, great technology and management is key, along with a lot of cash and R&D spending, as well as large partnerships and, of course, a growing client list.
Many companies are involved in proteomics. A new report -- Proteomics: The Coming Revolution? -- details the science and lists the companies involved. It is still early, but some investors suggest that proteomics will become a more important word than genomics. I haven't read the report yet, but a handful of Fools have, and one (Greg Carlin) reviewed it for you.
However you invest in biotechnology or bioinformatics, take your time and understand why you're buying whatever you buy. Also, realize that you should commit your money to a long-term period -- at least 10 years, and ideally longer. Enjoy your learning process in this fascinating field, and enjoy discussing it with others on biotech company boards. If you don't enjoy doing this work, it probably isn't worth it!