Forward-thinking investors with an eye on the future are always on the hunt for stocks in what could be the next game-changing industry. And some believe that biotech stocks and biotech investments could be just that.
‘Biotech’ is shorthand for biotechnology, an industry that combines biology with technology. Sounds futuristic right?
The basic idea involves the manipulation of living organisms and cells to create technologies and products that can improve our lives and the world around us.
Biotech stocks are businesses that primarily use these processes and techniques to develop products.
There are also biopharma companies that leverage both biotechnology and chemicals in the research process. There can be lots of intermingling and crossovers between these sectors.
As our understanding of cells and molecular biology becomes more and more fine tuned, there have been plenty of breakthroughs in the biotech sector.
It’s a sector that is moving at a fast pace and has the potential to completely flip our whole conception of how life on this planet works.
You might be concerned that this is basically a fancy way to describe Dr. Frankenstein’s experiments, but biotech developments tend to be much more subtle. The four main areas of biotech relate to:
While biotech can be an exciting space for an investor given it’s replete with innovation, that’s also what makes it an inherently higher risk investment.
The costs of researching and developing biotech products are extremely high. And, there are no guarantees that a company will even have something to take to market after spending piles of cash to create a product.
The flip side is that if a biotech company successfully develops a useful product, the rewards can be big. If a company can build something with the potential to revolutionise an industry like agriculture or healthcare, there may be money to be made.
But in the process of potentially getting to that level of success, a biotech firm is probably ploughing lots of money and effort into the process. All that, with the hopes of creating something that could shake things up. In the meantime, it can be hard to generate revenue, let alone profit.
So, biotech companies will sometimes team up with bigger, more established firms in an attempt to get a longer runway (aka the amount of time the firm can keep the lights on until it needs to raise more money). These partnerships can also give a biotech firm more flexibility and room to manoeuvre, allowing them to reach ambitious goals without hitting a brick wall if they run out of cash.
While the exciting nature of biotech and new discoveries can prompt investors to immediately look for biotech stocks to invest in, it’s important that we tread carefully.
High costs and low revenue are part and parcel of investing in biotech stocks, which can make it especially difficult to find the investments that could eventually be successful.
It’s also a sector that requires a long-term mindset. Many of the products being developed have to go through extremely long phases from first conception to market.
If you’re considering investing in biotech, remember that when you invest, your capital is at risk. This means the value of your investments can fall as well as rise, so you might get back less than you originally invested. That risk can be even greater with biotech firms, given many are still in growth mode.
Everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets you choose.
Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for a first-timer's investment decisions.
And if you are still unsure of how to pick investments, speak to a qualified financial advisor to develop your own investment strategy.
If, after carefully assessing your own circumstances and a stock’s investment case you determine you’d like to use your investment account to invest in biotech, there are a few different options. You can invest in:
Being popular doesn’t make these the best biotech stocks, but it does give you some insight into how other investors are putting their money to work in this fast-moving sector. You might decide to use this list as a launchpad into other biotech firms, or as a starting point to do your own research.
Here’s a quick rundown of some of the most-bought biotech stocks on the Freetrade platform in 2021:
AZN is a blue-chip stock that falls under the biopharma umbrella. So, it’s not a pure biotechnology company. But, biotech plays a big role for this British-Swedish firm based in Cambridge, England.
With a £160bn valuation AZN has the biggest market cap out of all UK stocks. A pretty astounding feat, achieved in part due to its contribution to the global Covid vaccine effort.
In its recent Q2 earnings, revenue came in at $10.8bn, topping even the highest of analysts’ expectations, and it also increased its sales guidance. But, AZN has 184 projects in the pipeline, which will be costly to develop and could slow down the growth trajectory.
This is another London-listed biotech stock. It’s much smaller than AZN in terms of market cap, even though the firm has been around for a few more years.
The company focuses on gene and cell therapy to develop gene-based medicines. It has also been working in partnership with AZN to manufacture an effective Covid vaccine, and still has an ongoing manufacturing deal taking place at OXB’s ‘Oxbox’ facility.
OXB will need to maintain these sorts of lucrative contracts going forward if it wants to generate sustainable revenue, especially since revenues have already started taking a hit with lower demand for Covid vaccines.
This is another biotech stock that caught the attention of investors over the last few years.
MRNA was another biotech firm to beat Q2 earnings and revenue expectations. The Boston-based biotech stock generated $4.7bn in sales, a 9% increase compared to Q2 of 2021.
However, this is also another stock still riding on the coattails of an unprecedented vaccine wave. Currently, its Covid-19 vaccine is its only commercially available product. That’s not exactly a diversified product portfolio, and the firm is already having to deal with rising costs to produce it and a big $500m write-off from expiring shots.
For many years, this US biotech stock put all its effort and might into experimental vaccines to deal with infectious diseases. And it answered the demand and calls from President Trump under ‘Operation Warp Speed’ to develop a Covid vaccine after being awarded a $1.6bn loan.
Approvals for its Covid vaccine in a few countries for various age groups gave the stock a boost. Yet, a recent recommendation from the European Medicines Agency (EMA) that the vaccine should carry a side effects warning could spell trouble ahead.
Vertex is based in Boston but also has research facilities in other biotech hotspots such as San Diego and Oxford.
The company directs its attention to conquering major healthcare issues around viral infections, cancer, and autoimmune disorders. The cystic fibrosis arm of the business has been particularly successful. And, it hopes to branch out, using the billions of revenue to bolster its pipeline of other products such as pain treatments.
As somewhat of a newbie in the biotech space, even with growth tracking along well, there is the potential that Vertex will not be able to repeat its current successes.
Whereas the bulk of the most popular biotech stocks is consumed with healthcare and vaccines, DNA is bucking that trend.
With debatably one of the catchiest stock tickers available, the self-proclaimed ‘organism company’ is favoured by major investment companies like Baillie Gifford and ARK along with a blessing from the king of Windows, Bill Gates. It specialises in using genetic engineering to produce bacteria for industrial purposes.
Although it has plenty of support from big-name investors following its SPAC IPO merger last year, its ambitious plans and recent $300mn acquisition of Zymergen need to be managed carefully to make sure costs don’t rack up faster than revenues. And while it can feel like a vote of confidence when investors with padded pockets dabble in a stock, remember that you should always do your own research.
The growth of ILMN may not have been as rapid as some of other biotech stocks listed here, many of which got a Covid-related boom. But, this is a company putting biotechnology on the map since 1998, long before all the recent hype.
This genomic-sequencing company has had a tough time in the market lately. After a strong 2021, with a 40% rise in sales reaching $4.5bn, the company is projecting a slower growth rate for this year.
Like most other biotech stocks, it’s having to deal with ongoing regulatory hurdles which may partly explain why this share is having a tough year.
BEAM was only founded in 2017, so it really is a new kid on the block in the biotech sector.
It has quickly made a name for itself with its pre-clinical gene therapy and genome editing research. While its sickle cell disease programme may hold some promise, the FDA recently issued a clinical hold on one of its other projects.
Since the firm is only in its infancy, this type of stock would require a long-term investing mindset. Whenever you’re investing, you should be ready to part with that money for at least five years. But the likelihood of needing an even longer mindset just grows when we’re talking about growth-stage stocks.
And as BEAM expands, it's going to have to deal with an increasing number of regulatory hurdles in the US and abroad.
This stock is listed on the NASDAQ but it’s a biotechnology company based in Mainz, Germany. Its approach is centred around patient-specific immunotherapies to treat diseases.
During the race to develop an effective Covid vaccine, BNTX teamed up with major US firm Pfizer. That’s a relationship it still benefits from today as the US is offering big bucks for the development of an Omicron booster.
However, the long-term prospects for BioNTech will largely be determined by what it's working on behind the scenes. It will need a major breakthrough to match the success of its Covid vaccine.
An ETF (exchange-traded fund) can be a great way to get some diverse exposure to the biotech sector without having to try and find the best individual stocks.
This ETF from iShares only invests in NASDAQ-listed stocks. So, you don’t get much international exposure since most of the major biotech companies can be found in the US. Though, that’s not to say these firms won’t have international operations or other ways they’re exposed to international customers.
The ETF mimics an index containing roughly 369 biotech stocks. It includes some of the major names discussed here, along with other major players such as Amgen (AMGN), Gilead Sciences (GILD), and Regeneron (REGN).
Something to remember when investing in ETFs though is that they normally carry an ongoing charge fee (OCF). The OCF usually includes the annual management charge (AMC) for managing the ETF, its registration fee, custodian safekeeping (think of this as a bank safekeeping the ETF’s assets), transaction fees, audit fees and regulatory fees too.
This ETF’s OCF was 0.35% as of the start of the year. Once you go past broad market index trackers, like those tracking the S&P or UK100, those fees tend to get slightly higher. There’s more work putting together the ETF, and because they’re more niche, fewer investors tend to buy these ETFs.
If picking out individual biotech stocks feels like it requires more time and research than you’re able to put in, investing in ETFs can be a useful alternative.
ETFs are regularly touted as one of the best investments for beginners because you can get some wide exposure to a sector, like biotech, with a single investment.
In such a technologically-driven sector, and with so much being spent on dead ends, it can be hard to predict the stocks that will prosper in the long run. So using an ETF that splits your investment across a number of biotech stocks can be a good way to help offset this risk through the power of diversification. But, with a specialist sector like this, you may have a limited selection of options available. Especially because many biotech firms won’t succeed in their ventures.
That means if you have an ETF which includes one of those stocks, the return on your ETF will be impacted.
On the flip side, if you can separate the good investments from the duds, then stock picking can mitigate the risk that you’re invested in a company that flops.
Sifting for diamonds in a pile of rubble can be challenging. So if you need some more help with buying stocks, you should check out our in-depth guide on how to invest in stocks for beginners.
Biotech has the potential to come up with some revolutionary technology over the next few decades.
So certain biotech stocks can play a role as a long-term investment in a balanced portfolio. But it’s a sector that comes with plenty of costs and challenges for the firms to tackle.
It’s important to understand that this sector got an unprecedented boost in attention and investment during Covid. While the huge spike in interest made certain stocks look more favourable than before, it’s no guarantee they’ll be able to replicate those successes in the future.
You don’t want to be banking on another global pandemic to get a good return on your shares. That’s a lot of eggs in one not-so-ideal basket.
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This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.
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