The impact of COVID 19 has left the world upside down in so many sectors. But man has long been habituated to getting adapted.
They have already absorbed the shock of the first mortal attack and stood up to rebuild the economy. Biotech is one such sector that has brought new hope and enthusiasm.
What is Biotechnology?
No bookish definition. Let’s see it from a general perspective.
Some decades ago, when you bought corn there was an 80% chance that your corn had a worm inside. How did it happen that today’s corn has almost no worms? Or how do the cotton trees today produce more fluffy cottons? It’s somehow evolution. But specifically, it’s biotechnology.
4 Types of Biotechnology
There are 4 types of biotechnology based on the common features of their final purpose.
- Red Biotechnology
- White Biotechnology
- Yellow Biotechnology
- Grey Biotechnology
The colorful names are really interesting and they do have significance. But we’ll be off to our main purpose.
How is Biotech Exciting and Scary as well?
There is certainly nothing to worry about Biotech. Neither should it be thought to be a hot cake. But if you see it from an elevated perspective you’ll find out so many happenings in there which should make the investors excited. Technologies like CRISPR, immunotherapies, CAR-Ts, RNAi— all are so promising and can really go on to not only treat but cure hundreds of thousands of diseases as they develop. That can easily be considered a very exciting prospect!
And if you combine that with the global population trends such as the fact that the average lifespan of man is increasing you can easily find the reason for spending more and more on healthcare.
The risk, however, is no less. A part of that, for example, is getting a drug through a very long clinical development timeline. There are roughly four essential phases:
- Phase I: Dose-ranging on healthy volunteers for safety
- Phase II: Testing of a drug on participants in order to assess how efficient the drug is as well as it’s side effects
- Phase III: Testing of the drug on participants to assess further reports on the usage and results of the drug
- Phase IV: surveillance in public after the drug has been marketed.
The blog post covering the tech melt covers many of the interesting issues regarding this.
Hurdles for Commercialization
There are several hurdles.
Getting through payers
Payers have to have the intention to cover the drug. Unless they are willing to offer the drug to their members the whole process must fail.
The bottom line is that they have to be ready to spend money after it.
Getting through the Healthcare Providers
The drug has to be within the choice of the healthcare providers so that they prescribe it. And, comprehensively, there comes a cost educating them and setting them to work for the drug.
And yet there is the need of follow-on safety studies. Though it is the main part of phase IV, and sometimes this is overcome, there is another part of it. The side effects and some of the negative aspects may be revealed after some years— when the drug reaches a wide variety of patients with numerous physical competence.
Strategies to Invest
There are some strategies that individual investors could take to lower their risk.
The first thing, and probably the easiest thing, that you could do is to use what we call ‘exchange-traded funds’ or ETFs. These funds have been raised for the individual investors to buy and thereby gain instant access to hundreds of individually biotech stocks.
This spreads their money across dozens and hundreds of holdings in an instant.
With ETFs, you are going to have a lot of security. Just like individual stocks you can buy and sell them, at your own consideration, through your brokerage.
It gives you the flexibility of using outer stock and at the same time, it also helps reduce some of the risks that you could face while trading as an independent individual.
IBB, the biggest and the most popular ETFs, comes with a dividend yield of 0.2% which, if considered from the biotechnology platform, is pretty remarkable. Over the last decade, the IBB is up 370%.
From the New Investors’ Perspective— What am I Not Getting?
Like anything else you need to sacrifice a little bit when you invest in ETFs. while using ETFs you find an expense ratio that you have to pay which is .47%. If you own individual stocks you wouldn’t have to pay anything like this. The XPI is a little bit lower at .35%. This is a modest thing that you give up in exchange for the broader exposure.
Over the last decade, these funds have shown impressive performance. They have both surpassed the S&P 500. I think that’s worth considering.
Contract Research Organization
There is another way to invest in bio-pharma and Biotech and we have found it safer. In an effort to reduce costs and speed up R&D many biotechs are now starting to outsource many of their clinical functions. This is handled by a class of providers known as the contract research organizations or CROs.
Now comes the inevitable question, why should we consider them as investment ‘opportunities’ right now?
Biotech investors know it very well that the regulatory approval process is not only a lengthy process but also expensive. And buying a CRO is directly benefiting them from that spending as well as the long lead time.
CRO generates income from the drug whatever the result is. If the drug fails to hold the market for long the CRO still rake something in for conducting a trial.
Though only about 40% of the biotech is outsourced it’s going to grow up to 50% over the next few years. Because of the complex regulations many of the biopharma are going to find a partner like CRO to help them.
Another powerful factor is insurance reimbursement. Biotechs, especially the smaller biotech companies, need to reach out to the global market and that’s what many of the CROs offer.
There are many more like this. But the bottom line is that you need to study hard before you dive deep in the biotech stock market.
Good luck with your investment!