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There are gains to be made in the biotech market, but investors must be savvy about which high-risk ventures to invest in.
Biotech investing is a risky endeavor with the possibility of high payoffs. That’s largely because most biotech companies are involved in the creation of products that remain in development for years and sometimes decades. Those long timelines create unpredictability for investors — for better or for worse.
Indeed, as Andrew Casey, president and CEO of Canadian industry association BIOTECanada, has explained, “because the timelines are so long, you’re looking at a 10- to 15-year investment. There are other places you could take your money and get a fairly quick return.”
That might sound discouraging, but as entrepreneur and investor Tyler Willis has pointed out, ultimately “investor returns usually come to the really smart investor working in the sector that everyone else is ignoring and that is about to become really important. And there are hundreds of proof points that bio is really a critical growth area for the next 100 years of human civilization.”
When to invest
The success or failure of clinical trials has an enormous impact on stock values. Good results can cause stocks to soar, while disappointing results often immediately erode value, making it much riskier to invest in a product before clinical trials are undertaken.
That of course means that investing later in the research and development process reduces the risks involved in biotech investing. And at the moment, that is what investors appear to be doing — the current market reflects a trend towards increased conservatism, with the number of initial public offerings dropping. In the first quarter of 2015, 10 deals valued at $789 million took place. That’s less than half the dollar value of the same period last year, when 30 deals took place in the first quarter.
Record-breaking market
That said, the decreased investment in initial public offerings isn’t indicative of the biotech industry as a whole. In fact, there has been significant growth in recent years, with the biotech market reaching record highs. According to a PwC report, in terms of dollars the biotech industry was the second-largest investment destination of 2014. During the last quarter of the year, the biotech industry raised $2 billion in venture capital through 112 deals. This 45-percent increase from 2013 was bolstered by a $446-million deal with Boston-based Moderna Therapeutics.
That upward trend has continued into 2015, with Bloomberg reporting that $18.7 billion in venture capital has so far gone into the industry. That is three times more than the first quarter of 2014, and the biggest total in at least 10 years.
Future insights
The biotech market is in a boom right now, with rapid growth and investment taking place. Many companies that have gone public in the last several years are now looking for new funds in an effort to capitalize upon the hot market.
However, that doesn’t mean risks don’t exist. Myles Clouston, senior director of NASDAQ Advisory Services, told Bloomberg News in 2015 that “everyone’s a little bit nervous today about a big sell-out.” As a result, he ultimately believes that “homework has to be done.” There are gains to be made in this market, but investors must be savvy about which high-risk ventures to invest in.
This article was originally published on Biotech Investing News on May 21, 2015.
Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.
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