Investing in Biotech Stocks

Biotech companies are the future of healthcare. They bring the newest science and the fastest innovation to a field of vital interest. Investing in biotech stocks can be quite rewarding, when the value of a new product is recognized. Yet it can be hazardous, too, when research is wasted and a product does not work out as planned.

The rationale for investing in biotech stocks varies. Some consider that the health care industry has moved to a new model, in which an established pharmaceutical company will serve as the financial and marketing arm for a true biotech, and that this will work to both company’s advantage. Some look at this cooperation a little differently, and believe that big pharma, Merck and the like, will take over successful biotechs and that therefore small biotech companies are attractive buys.

When big pharma partners with a small agile company both gain advantages. A partnership spreads risk, brings innovation to the established firm, and secures financial backing for the biotech. Biogen Idec is an example of a company that has formed partnerships. Biogen was one of the original biotechs, founded in 1978. It merged with Idec in 2003, and the combined company now has marketing agreements with Genentech, Elan, and the German pharmaceutical company Bayer Schering Pharma, among others.

Another approach for big pharma is to buy up small companies with successful research and/or innovative personnel. It would be hard to find a large pharmaceutical company that is not in the takeover business. For example, California’s Genentech is considered to have founded the biotech industry. Swiss pharmaceutical Hoffman-LaRoche owns the majority of its shares, and has offered to buy the rest.

Some investors search for specific stocks that will strike it rich with a stunning new discovery by watching the news out of conferences and conventions and by reading medical journals for clues. Some believe this research to be wasted effort, and put their money on the lions that they believe will rule the medical jungle, the biggest and highest rated companies, on the theory that they will end up with the prey.

Among small companies, Cephalon has a success in Provigil, but has had to spend big to defend its product. Pfizer is not a small company anymore, but it was when it started with an anti-parasitic called santonin. Later, it was a leader in fermentation technology, when it mass-produced the miracle drug penicillin during World War II.

Pfizer is one of the world’s largest companies now, and selling at a bargain price (maybe) as I write this. Other globe-spanning pharmaceutical companies include Johnson and Johnson, Bayer, GlaxoSmithKline, Novartis, and Sanofi-Aventis. On the other hand, Amgen is the largest true biotechnology company in the world. Investors who crave size and longevity might look among these names.

Another approach to biotech investing is to buy an ETF, exchange traded fund, with a stake in many promising biotechs. BBH has about 15 biotechs, with the large percentages Amgen, Genentech and Gilead. FBT tries to track the performance of the AMEX biotechnology index, while IBB tries to track the Nasdaq Biotechnology index. PBE invests in biotechnology and genome companies. Finally, XBI is the spider biotech sector ETF. None of these ETFs is truly diversified, obviously, but each is more varied than a lone biotech would be.

Biotech is certainly an important and interesting field. Whether this is the time to invest in it is another question. It is possible that for the brave and well-diversified, this is the place to take a chance, sooner or later.