The simplicity and utility of investing in a Biotech ETF

Filed under: Biotech ETF

You have heard of the prospects of the biotechnology industry and you would like to participate in at least some of the rewards. You do not have much capital and lack the expertise to evaluate and research the direct investment opportunities that are available. Let us look at some of the problems involved in evaluating investments directly in biotechnology stocks.

On the face of it, a value investment approach will rarely work with biotechnology companies. Their business is extremely volatile and in the absence of steady and predictable business and cash flows, there is very little information that is available for analysis. The typical biotechnology startup company is trying to convert intellectual property into products that can be marketed and sold for a profit. The process, especially for products in the life sciences business, it is extremely long and complicated involving clinical trials and regulatory approvals at different stages of the process. These companies have to raise money at regular intervals in order to keep up with their research and development and, without a sustainable business or profits, can only hope to survive if they could show sufficient progress to catch the attention of investors.

Valuation of a biotech company is extremely difficult and often a case of conjecture. It is almost impossible to place a value on intellectual assets such as patents or trademarks. Intrinsically any investment evaluation is an exercise in establishing a risk/ reward trade-off with an investment in government securities as the basis for a zero risk investment. For a high-risk investment like biotechnology, you would expect a substantial premium over the zero risk investment yield to compensate you for your risk. Here are some of the milestone events that would signal a successful progression for a biotechnology company:

-A patent valid in the United States. The patent laws allow a 20 year period to exploit the patent free of copycat competition especially in the case of a drug. Because the US is the largest market for life sciences, this patent is considerable commercial value and a biotech company in this position would be a prime acquisition candidate. Alternatively the biotech company may choose to build up the product in partnership with a major pharmaceutical producer.

-Confirmation of a lead molecule. The molecule marks the conclusion of the discovery of a drug and the commencement of clinical trials. It normally follows years of research and testing often with animals.

The average retail investor has neither the expertise nor the time to go through this complicated and difficult process in order to invest directly in biotech stocks .He can still achieve his investment objective of profiting from the biotech sector by investing in a Biotech ETF. To be sure, he may not gain as dramatically as investing in the stock of a single biotech company that produces a blockbuster product. However, the reduction in risk provided by the ETF as well as the diversification provides a comfortable cushion against incurring losses. Moreover, where a single biotech stock may not be particularly liquid, a Biotech ETF can be bought and sold on the stock exchanges at any time you please.

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