Biotech is a crucial industrial sector of the modern world. Something the pandemic made even more obvious than before. Despite this, it is not a “popular” investing theme like buying tech stocks.
A big reason is that it is a lot more difficult to evaluate a biotech company than in other industries. The products are complex, the regulatory environment is a minefield and the financials are not always straightforward. This complexity leads most investors to ignore the sector. But ignoring a field able to respond to pandemics, cure cancer or improve our health seems shortsighted. After all, the biotech sector (excluding chemical-pharmaceutical) is valued at half a trillion.
I was referring here to biotech (using DNA, cells, protein, etc…) as different from chemical pharmaceutics (producing chemical drugs). This distinction used to make sense, but nowadays, most pharmaceutical companies also have a biotech division. It is common for the investors in small biotechs to take their profit out when the company gets acquired by one of the giants “Big Pharma” firms.
The broader pharmaceutical sector is valued at $5.65 Trillion, putting it higher than software or oil & gas.
Depending on where they are in the clinical trial stages, biotech companies will be more or less challenging to evaluate. The earlier in the R&D and approval process the company, the more speculative. Pre-clinical companies will have an idea and potential drug candidates, but no data from humans yet. Once a company has passed the phase I, investors can at least be confident the drug is not harmful. But it is only after the phase II that will be known if it has any actual efficiency to treat the disease. Commercial stage companies are companies that are already selling a product. Some investors will prefer to pick only such companies, as the risk and volatility are lower.