Your biotech investing checklist

Filed under: Biotech ETF

The Biotechnology industry continues to be hot and the focus of a lot of media attention. If you are a new investor and do not quite know where to begin, this is your checklist to begin investing in biotech. Biotechnology is a fascinating sector to invest in because of the enormous potential to change the face of the health-care industry but you should be aware of the risks and the challenges.

Because of its dependence on regulatory approvals at every stage of the product development process, the non-receipt or even the delay of requisite FDA approval can be really bad news for the stock price of the company concerned. In fact any bad news such as the pull-out of a major partner in the pharmaceutical industry can cause nervous investors to dump the stock in a matter of minutes. In addition, some of the technology involved is so complicated that even seasoned biotech investors can fail to understand the science behind some product development. Naturally, much of the science is well beyond the grasp of the average investor.

This does not necessarily mean that the average investor should give up on the biotech industry. It is possible to formulate some commonsense guidelines and checklists to make the investment process easier. The first thing you should understand is that there are different varieties of high-technology companies in the industry. Some companies have become well-established and are making large profits from the products that they have developed. Other companies have promising drugs in the research pipeline and breakthroughs to blockbuster drugs could happen within a short period of time. Still other companies have extremely promising product in development but are at the initial stages of product development.

It helps to categories these companies into three broad groups. The first group would comprise large cap biotech companies that have established themselves firmly and are already highly profitable. The second group would consist of companies that are close to launching products which will establish them and make them profitable. The third group would bring together all the other companies in the industry including start-ups and companies in the earliest stage of developing products.

The best way for new investors who want to begin but do not want to go back to college to earn a degree in science is to start with the top tier companies. The advantage of investing in these companies is that they are already profitable or close to being so. This means that they are already earning revenues which will allow them to invest more capital in research and development. These companies will also have the wherewithal to withstand temporary delays and setbacks in their product pipeline and be the last stocks that are sold if there is a widespread sell off throughout the sector. These companies also lend themselves to traditional analysis far more readily than the newer companies.

If you would like to diversify your investment (even if you are only investing small amounts) and spread your risk, your best bet is to find a biotech EGF that has a high weightage in large cap biotech companies. It is true that your investment may not be as profitable as a single stock investment but, then again, your losses are unlikely to be as large. The ETF investment also relieves you of the bother of keeping track of the developments in the underlying companies.

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