Biotechnology stocks were some of the strongest performing stocks from 2009-2015. Then, the biotech bubble burst and just about every major biotech stock plunged into a private bear market. Since then, biotech stocks have bottomed and are now rallying once again. Valuations and sentiment have been reset which opens the door for higher prices. That said, here are two common mistakes investors make when investing in biotech stocks.
Avoid The One Hit Wonders:
Biotech companies come in all different shapes and sizes. One big mistake investors make is that they see a company with one hot drug and they think that is enough to change the world. The problem many companies face is that they need to innovate to stay relevant in the long run. I spoke to Joshua D. Goldman, PhD, CFA who is a Partner and Director of Research at Taylor Wealth Management Partners and he prefers to avoid companies with only one drug candidate and told me, “An investor should favor companies that have a core technology which is already proven safe and potentially hints at being effective i.e. a therapy based on this core intellectual property has already made it beyond phase I and hopefully phase II clinical trials. This should increase the chance that other drugs based upon the same core intellectual property are also safe. If there are many drugs in the pipeline based on the same platform, than an investor has “many shots on goals” thereby increasing the likelihood of success.“