Should you invest? Should you invest in biotech stocks? Should you invest in biotech stocks right now?
I think there are good answers to each part of the question and to the overall question itself. As you'll see, however, to get to those answers will require even more questions to be addressed.
Should you invest?
The first embedded question in our bigger question is by far the easiest to answer. And that answer is a resounding "yes." You should invest. Period. End of story. No matter how old you are. No matter what your expertise or lack thereof in investing is. Investing is a smart thing to do.
Of course, before we get to the second question-within-a question, we need to tackle an implied question here: Should you invest in stocks, not limiting ourselves only to biotech stocks? My view is that investing in stocks is a smart idea. Over the long run, stocks tend to handily outperform other asset classes.
Having said that, how much of your total portfolio you invest in stocks will differ based on your stage in life. If you're retired, you'll want more of your money in bonds than a 25-year-old or 40-year-old person would. But I think that at least some portion of every investor's holdings should be in high-quality stocks.
...in biotech stocks?
Now to dive into the nitty-gritty. Biotech stocks, or at least many of them, aren't ideally suited for every investor. That leads to an important follow-up question: How much risk are you willing to accept?
Many biotech stocks are highly volatile and very risky. Take Amarin (NASDAQ:AMRN), for example. The stock was sizzling hot in 2018 after the company reported overwhelmingly positive results from a cardiovascular outcomes study for Vascepa. Amarin continued into last year with solid momentum as well.
Then the coronavirus outbreak hammered the stock. But the huge blow to Amarin was the biotech's loss of a patent challenge to Vascepa in March, causing the stock to plunge close to 70%.
Patent protection is critical for drugmakers. Many biotechs routinely face patent lawsuits and the associated risks of losing the litigation. Investors with a low tolerance for risk absolutely should stay away from biotech stocks of companies that depend largely on one product for generating revenue.
Cautious investors will also want to avoid buying shares of biotechs that don't have an approved product on the market yet. On the other hand, more aggressive investors might like some of these stocks.
As a case in point, I personally think highly of the prospects for Novavax (NASDAQ:NVAX). The company doesn't have an approved product yet, but it reported positive results from a late-stage study of its experimental flu vaccine NanoFlu a few weeks ago.
There's no guarantee that Novavax will win FDA approval for NanoFlu. It's not a slam dunk that the biotech will be successful commercially even if it does win approval. Novavax could also need to raise additional capital by issuing new shares, diluting the value of existing shares. But if you're the kind of investor willing to take on a significant level of risk, Novavax could very well be a stock that's up your alley.
Are there any biotech stocks that are suitable for more risk-averse investors? Maybe.
I think that Vertex Pharmaceuticals (NASDAQ:VRTX) is a relatively safe pick. The company has a virtual monopoly in treating the underlying cause of rare genetic disease cystic fibrosis (CF). It has picked up key reimbursement deals in several countries that should expand its market opportunity. Vertex also has a new CF drug, Trikafta, already approved in the U.S. and awaiting European approval that should be a huge winner.
Still, though, Vertex faces some risks. While I expect Trikafta will win European approval, there's a small chance that it won't. Vertex could also experience clinical setbacks with its pipeline candidates. I really like the stock, but it's not one that every investor would want to consider.
Timing is a wild card when buying any kind of stock. No one knows for sure what the stock market will do over the next few weeks and months nor does anyone know what biotech stocks will do. And that raises yet another question: What is your investing time horizon?
If you're not prepared to invest for a multi-year period (ideally, at least five years), my opinion is that you shouldn't invest in stocks and especially shouldn't invest in biotech stocks. But if you're a long-term investor, I think that now is a fantastic time to buy biotech stocks.
For one thing, most biotech stocks are more attractively priced than they've been in a while thanks to the COVID-19 pandemic. But while some companies are having to pause clinical trials because of the viral outbreak, most biotechs' long-term prospects shouldn't be impacted by the coronavirus.
Sure, many biotech stocks could decline more than they already have. However, since there's no way to time the market, investing some now and more incrementally over the next few months in biotech stocks with great products and strong growth opportunities seems like a good strategy in my view.
The answer to the question of should you buy biotech stocks right now comes down to what your investing style is. But for quite a few investors, I think that scooping up shares of promising biotechs like Vertex makes a lot of sense now and over the coming months.