The Biotech Stocks Dilemma: Invest or Divest?

If you are thinking of adding biotechnology stocks to your portfolio, do bear in mind that there is high volatility

Towards the end of 2015, biotechnology stocks began languishing. Midway through the year, the S&P 500 Biotech Index hit a rough patch, plummeting 20% from its July high. At that point in time, investors and traders were deeply concerned about the China factor and how it would impact on global growth prospects. It turns out that those concerns were justified as the Chinese equities rout wiped $5 trillion worth of value from the markets. Of equal concern at the time was policy change vis-a-vis regulation and the pricing of drugs. Despite the pullback in the performance of Biotech stocks, there are many investors who remain cautiously optimistic about Biotech.

What is notable in the past two months is the move towards juggling biotech portfolios to remove the poorly performing stocks and replace them with more solid alternatives. I’m of the opinion that within the next 5 to 10 years (biotech stocks are long-term investments), we will see tremendous value being generated off of certain biotech stocks and the profit potential is equally enticing. In other words, the stock should be included as part of your financial portfolio, provided you pick them wisely. If you are risk averse, or you get heart palpitations from sharp rises and falls in stocks – avoid biotech.

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The S&P Biotech Select Industry Index has a year-to-date return of 11.26%
The S&P Biotech Select Industry Index has a year-to-date return of 11.26%

What You Should Know About Biotechnology Stocks

There are various patterns that are evident in the biotech sector. It should be known from the outset that volatility is an inherent component of biotechnology stocks. This is especially true of the short-term. There has been a move in recent times to focus more on what is known as ‘legacy pharmaceutical drugs’ as opposed to dynamic, innovative and cutting-edge biotechnology companies. As an investor, my advice to you is to include biotech stocks as part of your overall financial portfolio, but do it in a way that reflects your appetite for risk, or your aversion to risk.

There is plenty of opportunity to be had over the long-term with innovative biotechnology companies. When biotech stocks retreated by 20% in October, it was a slowdown in China that precipitated that. There is also concern about the future pricing models likely to affect the industry. While China seems to be an important component of Biotech pricing, it is hardly an important country in terms of biotech sales. The vast majority of revenues generated by biotech companies are derived from the United States in continental Europe. This is evident with companies like Biogen and Gilead sciences.

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Pricing concerns remain at the heart of Biotech ‘investability’. For example, a decades-old drug that is facing increasing costs is worlds apart from new research and development initiatives for the purposes of diabetes, Alzheimer’s or psoriatic arthritis treatment. There is a growing awareness among those in the policy-making arena that these types of biotech drugs have the capacity to save lives and combat illnesses. Long-term, there is definitely plenty of upside potential for biotech stocks, and this is something that I firmly believe in. Even with the current pullbacks that we are seeing in biotech, they should not be viewed as a negative – rather a buying opportunity to cash in before the inevitable upswing.

Companies that are not deeply invested in innovative technologies should be avoided – innovation, dynamism and future-orientation are key to survival in the biotech sector. There is no doubt whatsoever that all the years of investment, research and development are beginning to pay dividends- consider that in the 10 years between 2000 and 2009 more approvals of biotech and pharmaceutical drugs passed through than in the entire 20-year period of the 1980s and into the 1990s.

What are the Most Important Factors Driving Investment in Biotech Today?

  • Economic insensitivity and innovation
  • A glut of start-ups in the biotech industry
  • The rapidly aging populations of developing and developed countries
  • The introduction of highly personalized medicine in the form of the HGP (Human Genome Project)

If you are thinking of including biotechnology stocks as part of your overall investment portfolio, you should bear in mind that there is high volatility with these funds. Dynamism, innovation and risk are part and parcel of the process. I would recommend allocating a small percentage of your overall portfolio to biotechnology stocks like Pfizer, Roche, Amgen, Bluebird Bio, or Valeant.

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