Technology has been integrated into almost every aspect of daily life. Computers and mobile devices are critical to business operations, and a wide variety of smart devices have transformed average houses into interactive homes. However, scientists have only scratched the surface of one last frontier – the space where biology and technology meet.
Biotech companies are producing some of the most exciting solutions for today’s biggest problems.
New treatment protocols for deadly diseases are in the research and development phase, and biotech firms are at the forefront of innovation when it comes to improving the efficiency of food production, creating alternative energy options, and protecting fragile ecosystems around the world.
While profits are never guaranteed, most investors are certain that the next company to identify and produce a major advancement in the field of biotechnology will also produce considerable rewards for shareholders. The question is, which company is most likely to create the next transformative biotechnology product?
The Pros and Cons of Investing in Biotech Stocks
Biotech is likely to create the next big wave of stock-related wealth, because these firms are focused on humanity’s biggest problems.
Assuming you choose the right company, buying shares of a biotech firm before the launch of a successful product has no downside.
Unfortunately, the most difficult challenge investors face is choosing the right company. When it comes to cons, this one is insurmountable for all but the bravest investors.
Biotech companies take big risks, and they typically need massive amounts of capital during the research and development phase of their products.
Most ideas are ultimately unsuccessful, and the investment is lost. Consider, for example, the story of Theranos – a biotech company that rose to dizzying heights before going completely bankrupt.
Investors put billions into a business that promised to bring an impressive concept to market. However, it was ultimately unable to transform the idea to a real, working product.
The industry is full of companies that offer winning proposals, but very few of these are ever successfully launched.
Choosing a Biotech Stock
There are some steps you can take to reduce your level of risk when choosing a biotech stock. These are important points to consider before investing:
- For companies attempting to bring new drugs to market – has the medication successfully completed the clinical testing phase? These trials can make or break a product, which is ultimately reflected in the stock price.
- For companies who have already brought new drugs to market – keep in mind that many of these businesses need to put every cent of their profits back into research and development. Be prepared for a long wait before you see any profits yourself.
- How many products are in the pipeline? Companies that only have one major project in the works are far riskier than those with multiple irons in the fire. The more products currently in development, the more likely that one will be massively successful.
- Have other companies shown interest in a partnership? Smaller companies often accept financial assistance from larger organizations, with the understanding that the larger organization will share in the product’s success. When other firms are willing to invest, you can be somewhat more confident about investing yourself.
Finally, as with any investment, carefully review financial statements and verify the company’s claims before buying stock.
In the case of Theranos, a few quick calls would have tipped investors off that claims about the product’s effectiveness were simply not true.
There are three biotech companies currently at the top of many investors’ buy lists – but what are the analysts saying?
Is Celgene Stock a Buy?
A number of biotech firms lost value at the end of 2018, and Celgene [NASDAQ: CELG] was among them.
Analysts almost universally agree that the company made significant strategic and operational errors that directly contributed to the losses.
However, Celgene [NASDAQ: CELG] still has a lot going for it, so investors are taking a closer look.
Pros like a selection of strong drugs already on the market and a promising pipeline of potential blockbusters are just part of the story.
At the beginning of 2019, Celgene [NASDAQ: CELG] announced that it would be acquired by Bristol-Myers Squibb in a transaction set to close during the third quarter of 2019.
Assuming all necessary approvals are granted, Celgene shareholders will receive 1.0 Bristol-Myers Squibb share and $50.00 in cash for each share of Celgene.
They will also receive one tradeable Contingent Value Right (CVR) for each share of Celgene, which guarantees future rewards when the combined company meets future regulatory milestones.
Should You Invest in AbbVie Stock?
AbbVie has long been a favorite among seasoned biotech investors, because it has had reliable revenue from its signature Humira drug. However, the company faces some challenges in the near-term, and those new to biotech investing are hesitant to buy.
The biggest issue is that Humira is responsible for 60 percent of AbbVie’s revenues, which has always been a pro for shareholders. However, it will soon be a con, as biosimilar medications are coming to market.
They have already arrived in Europe, and sales of Humira have dropped by 15 percent since their introduction.
AbbVie [NYSE: ABBV] expects a total reduction of approximately 30 percent of its international revenue in coming months. When the alternatives are available in the United States beginning in 2023, AbbVie’s revenues are expected to drop precipitously.
On the pro side, AbbVie [NYSE: ABBV] does have several additional drugs on the market already, and there are new opportunities in the pipeline.
If these are as successful as expected, the company’s revenues could jump dramatically, regardless of Humira sales.
Is Exelixis a Buy or a Sell?
As a small biotech firm, it took some time for Exelixis to capture investors’ attention. However, the approval of Cabometyx in 2012 changed all of that. Cabometyx is the first choice for treatment of the most common form of kidney cancer, and revenues from this drug continue to go up.
Exelixis [NASDAQ: EXEL] is now focused on opportunities to use this medication in liver cancer treatment, which could drive revenues up even more.
Finally, many investors are interested in Exelixis [NASDAQ: EXEL], because there are signs it may be acquired by a larger biotech company within the next few months.
If this occurs, Exelixis [NASDAQ: EXEL] shareholders that buy in before the acquisition announcement may get a premium when it is time to trade in their stock.
Biotech is an exciting industry, and everyone is looking to these firms for solutions to today’s biggest problems. If you choose to buy biotech stock, you are in for a thrilling ride.
Those that invest in the companies responsible for tomorrow’s breakthroughs will enjoy substantial profits.