The biotech investing roller coaster

By Chip Brian | May 1, 2011 | Last updated on May 1, 2011
3 min read

Biotechnology is one of the most interesting sectors of the stock market. In how many other industry groups are companies striving to develop revolutionary new ways to save lives? What other industry matches biotechnology in the sheer number of stocks that could double if their companies’ plans come to fruition?

The performance of this sector is also tied to the availability of venture capital, since so many of these companies rely on funding to get them through research and development, and up to the stage of having products ready for sale to pharmaceutical firms and/or to put into production.

American biotech funding was fairly consistent and strong through 2007, nose-dived in 2008, and has been bouncing back from 2009 lows. Given this volatility and the huge capital requirements of the sector to deliver products, what’s an investor to do?

In its most general sense, biotech is used to refer to any sort of technology that uses biology or other medical technology to accomplish its end. It includes the use of microbes, or life processes, to produce materials and products that are useful to mankind.

The hot areas of research today are cancer; HIV/AIDS; diabetes; heart, neurological and immunological diseases; viral infections — illnesses that have a high degree of incidence in the population.

From an investment standpoint, companies doing this innovative and potentially game-changing biotech research offer tremendous opportunity. If a therapy makes it to market and gains medical acceptance, it could join the ranks of pharmaceutical products that generate more than $1 billion in annual global sales, sending the company’s stock through the roof.

However, the risks are also quite high. Many of the smaller medical R&D companies — and there are literally hundreds of them in the United States alone — are focused on a single therapy, whether a drug or other type of treatment, or on a single disease. If the therapy fails, or the company runs out of money before testing can be completed, the stock can go bust in a matter of days. And, even if it finds funding, the arduous testing and approval process can drag on for a decade or more, with the stock often languishing in the meantime.

Industry in an uptrend

We have identified the Biotechnology industry group as being in an uptrend, and SmarTrend has identified significant returns from the stocks of several biopharmaceutical companies in this sector.

MDVN (Medivation, Inc.) is focused on the development of novel small-molecule drugs to treat serious diseases for which there are limited treatment options. MDVN is in an Uptrend called by SmarTrend on September 13, 2010 at $11.65. With a price of $22.81 at the end of April 2011, this stock has increased 93% since Smar-Trend’s Uptrend was issued.

REGN (Regeneron Pharmaceuticals, Inc.) discovers, develops, and commercializes pharmaceutical products for the treatment of serious medical conditions. REGN has strategic collaborations with Sanofi-aventis Group and with Bayer HealthCare LLC to discover, develop, and commercialize innovative treatments. SmarTrend identified the Uptrend for REGN on November 22, 2010 at $28.37, and with the stock trading at $48.93 at the end of April, the return to date has been 73%.

INSM (Insmed Incorporated) focuses on the development of inhaled pharmaceuticals for the site-specific treatment of serious lung diseases.

SmarTrend currently has shares of INSM in an Uptrend and issued the alert on March 25, 2011 at $5.84. INSM was trading at the end of April at $9.05, an increase of 55% since the date the Uptrend was issued.

CBST (Cubist Pharmaceuticals Inc.) is focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute-care environment. At the end of April, CBST stock was trading at $33.59, an increase of 40% since SmarTrend issued an alert on its Uptrend on March 9, 2011 at $23.95.

It’s wise to diversify your portfolio of stocks, and biotechnology is a great industry to have on your list. Also, it’s better to spread out your investment over a group of stocks if they are “early stage” companies. Remember to research your investments thoroughly, and use a trusted trading system so you base your buy and sell decisions on reliable data, rather than on emotions.

Chip Brian