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Investing in Biotechnology Companies: Pros and Cons

Andrew and Dave recently talked about investing in Biotechnology Companies on their podcast and it was by far, one of my favorite episodes that they have ever done, and I can say that for multiple reasons:

  • Biotechnology Companies are the hot thing right now.  Think that toy in Jingle all the Way that Arnold Schwarzenegger is doing everything he can to find a way to get.  That’s how people are treating these stocks.
  • They go through a very thorough discussion of a company, Jounce Therapeutics (JNCE), and talk about the numbers behind the stock and whether it is a good investment.

For starters, biotechnology companies are those that use living organisms to make drugs.  Some of the largest and most well-known biotechnology companies include Pfizer, Johnson & Johnson, Tilray, Gilead, and Amgen.  Chances are you have heard of some of these companies but regardless, let’s check out some of the pros and the cons of investing in biotech:

Before I get into the specific pros and cons of biotech companies, I think it’s very important to explain the nature of these companies.  Biotech companies are super, super risky.  You’re trying to find a company that you think is going to be able to hit it big and one of their drugs are going to pan out for them. 

The success rate is extremely low and only 10% of companies will actually go from startup to being successful and that is simply due to the high risk nature of the business.  This is the closest thing in investing to playing the lottery, in my eyes. 

That doesn’t mean that it’s bad or a stupid investment – it just means that you need to make sure that your expectations are aligned with the potential outcomes prior to investing.

  • Pros
    • High Reward Potential
      • As mentioned, it really doesn’t take much for a company to experience overwhelming amounts of success.  One drug can really make the stock price boom, but it is very hard for a company to get to that one drug.
      • An example of a company that has boomed over the last year has been Eyenovia (EYEN) which has gone from $2.00/share to $3.86.  With that being said, the company is still not profitable, so people are still buying in on the hype and potential of making it big!
    • High Chance for Acquisition
      • Since 2018, I counted 36 acquisitions of biotech companies based off this awesome list from Index.  If you have ever had a stock get acquired, you know that there likely is going to be a major bump up in share price as soon as that acquisition is announced, which is great for the owners of that company. 
      • Not only are you going to experience that initial bump, but you’re now likely going to own shares of a larger company, and theoretically that company will use this new technology/competitive advantage that they purchased to help them grow even further!
  • Cons
    • High Chance to Go to $0
      • Just as there is a high ceiling for potential, there also is a high potential for a stock to go to $0, and it’s much more likely than the ‘boom’ that you’re seeking.
      • Two great examples of this are Genprex (GNPX) and Tilray (TLRY) who have gone from $1.14 to $.24 and $75.15 to $17.31, respectively (but not respectfully).  I mean, that’s only a decrease of 79% and 77% – that’s chump change!  (obviously kidding)
    • High Failure rate
      • I mentioned that it doesn’t take much for a company to boom due to the low success rate, but that means that the company is failing…a lot.  So, you need to look for a company that can sustain this high failure rate and keep on persevering, otherwise it’s going to be a short-lived experiment for your hard-earned money.
    • Risk-tolerance isn’t necessarily good
      • Personally, I have a high risk-tolerance, and this gets me far in my investing journey because I can wait out the hard times.  I legit look forward to a stock dipping so I can buy more and view it as a discount. 
      • Now, if something materially changes, I make sure to be aware of that and adjust my strategy accordingly, but if it’s trade war talk or some other meaningless news piece like a bad advertisement (think the Peloton ad) then I am viewing it as a short-term clearance sale! When investing in most stocks, I think this is a great mindset. 
      • When investing in biotech, I do not think this is a good quality.  Biotech stocks legitimately can go to $0 very fast, so holding on and buying more is just doubling and tripling down.  You don’t have fundamentals to fall back on like you do other stocks. 
      • It’s nothing more than a guessing game.  It would be like going to a casino, losing $25 betting red on roulette, and then betting $50 the next spin because you’re going to make that all up because YOU KNOW things will eventually change.  But guess what – they might not.  That little ball might be red every single time. 
      • You have no way whatsoever of knowing how these stocks will turn out, and no fundamentals to help guide you.

At the end of the day, biotech stocks are gambling.  I am not opposed to gambling, but you just need to understand the risk/reward potential before starting.  I have some riskier stocks in my portfolio and I am completely fine with the possibility that some of them will fail, but I am young and want to take some risks and try to see if I can get out of the gate quickly and jumpstart my path to financial freedom.

You need to understand these risks and the situation that you’re in before making a decision for yourself.  Would I ever invest in biotech companies?  Likely the answer is going to be no. 

Maybe at some point I’ll get so rich that I will invest in some of them for fun…who am I kidding – no I won’t.