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What Are the Risks of Investing in Biotech Stocks?

By Taylor Carmichael - Mar 11, 2021 at 12:00PM

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The sector has incredible upside over the next decade. How should investors approach this market opportunity?

Healthcare Bureau Chief Corinne Cardina and Motley Fool contributor Taylor Carmichael discuss the fantastic upside of the biotech sector, as well as risks and how investors might handle them. This segment was recorded live on March 5

Corinne Cardina: ...let's talk quickly about the risks of biotech. So what should investors know? Should we buy one biotech stock? Should we buy 10 biotech stocks? Should your whole portfolio be biotech stocks? Spoiler: No, it shouldn't. Taylor, talk to us about the risks.

Taylor Carmichael: Yeah. No, definitely, I'm a believer in diversity. So you want to kind of diversify your port. Biotech can be [risky], it depends, obviously. There are some biotech companies like Amgen (AMGN 0.02%), which is not particularly risky at all. I mean, the only risk there, I think, is underperforming the market maybe, but Amgen is a huge company.

One real question [for biotechs] is whether this is an unprofitable company and they're still in the development stage, research and development stage, or whether they have drugs on the market. So that's a huge important issue and how big the company is, how big the market cap is. Small caps are typically more risky than larger caps, but as we saw with COVID-19, small caps can have amazing returns. So as you get more and more confident about your research and about your selections, you might push the envelope a little bit and invest in smaller-cap companies because that's where your amazing returns will be.

The important thing to think about, I guess, is healthcare is heavily regulated. I mean, that changes the analysis between healthcare and every other sector, I think, because it is heavily regulated by the government. I mean, you're not allowed to market your drug or your technology to people until the government approves it, and that's fundamentally different than most of the markets. If you create a new software, you can sell it right away. You create a new drug, it might be years before you can sell to people. So that's a fundamentally different thing.

The other thing, of course, is once you have that approval, then you have a government sanctioned monopoly until the government approves somebody else. So typically drug companies that have a drug on the market, if they don't have a lot of competition, their margins are going to be huge, their profit margins are going to be off the roof. Another thing I'd like to think about in biotech, you're really doing a good thing by investing in biotech because you are improving scientific research, you're saving lives theoretically. Even if I have an investment that turns out bad and it doesn't work, in the back of my head I'm like, "You know what, I did a good thing, I invested in this company." Knowledge was increased, science was helped and I just write it off in my head as a charitable contribution. I don't sweat it.

But yeah, I would absolutely diversify, and I do think you should open the door to biotech investing because I do think that we're going to have an amazing decade over the next 10 years, and I think a huge amount of money is going to be made in the sector. I would absolutely advise people to look at healthcare companies. I would also suggest maybe diversify within healthcare, that you don't just focus on pharmaceutical companies, but you also get tele-health, for instance. You might get a Teladoc Health (TDOC 5.65%) or OptimizeRx (OPRX -1.01%), which we talked about last week or two weeks ago. I would suggest you look at how the internet is affecting healthcare because that's a huge opportunity going forward, and also medical devices. Medical devices are a huge thing. The gene sequencing, that whole area, we're seeing a tremendous amount of money being made there. I would diversify within that. Pick just one or two companies. I have several healthcare companies in my portfolio, so I have a bunch. But I would not solely invest in healthcare, but I would also diversify within it as you invest.

But I would definitely be in the sector. I do think a lot of money is going to be made here, and this is going to be a huge one going forward.

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Stocks Mentioned

Amgen Inc. Stock Quote
Amgen Inc.
AMGN
$253.05 (0.02%) $0.04
Teladoc Health, Inc. Stock Quote
Teladoc Health, Inc.
TDOC
$33.45 (5.65%) $1.79
OptimizeRx Corporation Stock Quote
OptimizeRx Corporation
OPRX
$24.60 (-1.01%) $0.25

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