Issues in biotechnology investments

Filed under: Biotech ETF

Biotechnology has always been a very attractive if slightly risky investment. The chances of multiplying your investment many times are probably brighter here than in any other sector. Here are several issues that you need to consider when considering investments in biotechnology either directly in stocks or through a Biotech ETF.

The Food and Drug Administration is the government regulatory body that approves new drugs for use in the USA and also permits clinical trials that make the commercial launch possible. They are therefore critical to the success of any biotech company. They require that any company has to prove that the drug that they plan to introduce is safe and effective in accomplishing the purpose for which it has been created. You have therefore to understand how the FDA works and what its requirements are. A biotech company has to create a body of evidence of both safety and effectiveness and this is normally done through a set of three clinical trials.

The goals for safety and effectiveness are generally set by the company in consultation with the FDA and if the trials are satisfactory, the company must formally apply for approval in a form which is called a New Drug Application. On payment of a substantial filing fee with the application, the FDA assigns the date by which it will convey its decision and this is called a PDUFA date. The application is reviewed and, if necessary, a special panel of experts is constituted to advise the FDA on whether approval should be given or withheld. The recommendation of the panel is then reviewed by the FDA which then takes its final decision. If approval is not to be granted, a complete response letter is issued and this is tantamount to a rejection. The letter will point out the concerns of the FDA and the company is free to collect further information and then reapply for approval.

The products that the company is developing are known as its pipeline and the value of the company will depend on what is in this pipeline. You should try and choose a biotech company that has several products in Phase Two testing rather than a single product in several phases of testing. A single product might always make it big but the chances of success are much improved if there are several products that are being tested. It is the value of this pipeline that makes biotech companies and attractive acquisition for pharmaceutical companies looking to expand their own pipeline.

The value of a biotech company also depends on the particular disease that it is trying to treat. For instance, diseases like cancer always have blockbuster drug possibilities but there are already numerous treatments available. Any new treatment has to have a plus point in terms of efficacy and/or safety. On the other hand, less common diseases offer more potential success because of the relative lack of competition and the better chances of making an impact.

For a variety of reasons, including a saving of time and a lack of competence, you are better off investing in a Biotech ETF of your choice. This will provide liquidity and diversification for risk management. All you have to do is to examine the composition of the ETF to ensure that the individual assets and the asset allocation are in line with your risk appetite.

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