Biotech Is Not for the Weak of Heart

Biotech investing can be quite the roller coaster. Long periods of waiting are often followed by rapid and dramatic changes in stock prices when the results from clinical trials or regulatory reviews are announced. No other sector produces as such huge gains or such steep losses in such short periods of time.

And it happens every year.

This year's winners and losers
Here are the top five winners in the pharmaceutical and biopharmaceutical sectors this year with a market capitalization greater than $250 million:

And here are the top (or should I say bottom?) five losers:

Winners such as Medivation and Acorda Therapeutics experienced dramatic share price increases due to positive clinical trial results. Others such as Sirna popped after agreeing to be acquired by a larger pharma such as Merck. Neurocrine's big losses came after an unfavorable FDA review of its lead drug, while CV Therapeutics has been on the decline due to lackluster sales for its recently launched lead drug.

It's worth noting that this list ignores horrors such as Renovis (NASDAQ:RNVS), which is now valued at less than $250 million but was trading for nearly five times its current $95 million mark before negative clinical trials results sank the stock.

Why they do what they do
The one thing many of these volatile biopharma stocks have in common is that their futures are highly leveraged to one or two drugs and have risen or fallen based on the prospects for those lead drugs. You won't ever see a diversified biopharmaceutical company like Genentech or Amgen on this list of largest share price gainers and losers, because their prospects are not as concentrated.

Because of the huge volatility for these one-drug wonder stocks, I wouldn't ever recommend making one of these companies more than a small portion of your portfolio. If you diversify your investing dollars across several of these specialty biopharmas, though, your portfolio's performance won't take such a large hit if an unforeseen event sinks one of the stocks.

Since the risks are so high but the rewards so great with investing in biotechs, it's important to be able to analyze the clinical trial process before investing. The Motley FoolRule Breakers growth investing service has two such biotech gurus in Karl Thiel and Charly Travers. Their 16 biotech recommendations have averaged 17% returns to date -- with one up more than 300% -- putting them 6 percentage points ahead of the broader market.

The Foolish bottom line
Biotech investing is not for the weak of heart. Investors searching for stable stocks with minimally fluctuating share prices would be better sticking off with dividend-paying stocks or large-cap blue chips. Those willing to invest in this cutting-edge field, however, can also earn rewards beyond what blue-chip investors can even dream about.

If you're up to the task and want some expert opinions on promising stocks in this industry, try a free 30-day trial of our Rule Breakers growth investing service. There is no obligation to subscribe.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. CV Therapeutics is a Rule Breakers recommendation. Merck is a former Income Investor pick. The Fool has adisclosure policy.