The business of curing diseases can be a lucrative one, and investors will jump on the bandwagon for any stock that shows the promise of a big breakthrough.
Biotechnology stocks are great for long-term investment. Biotechnology is trading on big discounts to the market now. That’s one good reason why we think now is a great time to buy into the sector. Others think that the field of biotechnology is so competitive and risky that people should avoid these stocks until a company has a made a proven and accepted technological advancement. Clinical trials and the process of getting Food and Drug Administration approval for products can significantly reduce the earnings of biotechnology companies. Research these stocks carefully before adding them to your portfolio.
You probably have heard stories about novice traders that build up their trading accounts from mere thousands into millions. Biotechnology is a sector where traders seek out these such huge profits. For smart traders, this sector can present an incredible area of opportunity, but for those who are not willing to do their homework, it can be a train wreck waiting to happen. In this article, we’ll examine the issues that you should consider before putting your capital at risk.
There are different points to analyze a biotech company. This is different from analyzing common stock
All new drugs must go through a lengthy testing and approval process supervised by the Food and Drug Administration (FDA). Each drug must complete three sets of clinical trials called Phase I, Phase II, and Phase III, typically running 18 months, two years, and three to four years, respectively. Products successfully completing the clinical trials are submitted to the FDA for marketing approval, a process usually taking one or two years to complete.
Given these timeframes, it’s best to focus on companies with at least two products in phase III trails or awaiting final FDA approval. More is better, and you want companies with a steady stream of products in all testing stages.
Most biotech firms have few, if any, products already on the market generating income. Companies without income to cover expenses are said to be “burning cash.” Analysts often compare a company’s assets to its “burn rate” to determine how long the company can survive before running out of cash. They say it’s better to stick with companies with a least two years supply of cash on hand.
If you take the history of Biotech companies, most of them had been at the brink of Bankruptcy at one point of their life. This is primarily due to the lack of income during the research and development stage of the product. It takes long to successfully develop, get approved by FDA and successfully market the product.
The biotechnology sector is very exciting and can be very rewarding for those who remain cautious and do their homework. However, it is easy to get caught up in the dream of 1,000% gains, or the intriguing stories of how certain companies’ products will change the world. It is important to realize that if you are aiming for huge gains in the biotech sector, you likely will encounter some bad trades that will leave you reeling at the reduction of the value of your account. We all know that investors make mistakes and, as shown above, even the big players can see their picks lose most of their value. If the big players can be wrong completely, so can you, so trade with caution and restraint. When it comes to investing in this high-risk sector, it may be wise to use only as much money as you can afford to lose.
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Very good info.