risk

Risks of investing in Biotech stocks

* Biotechnology
o What is Biotechnology?
o Valuation
o Investment risks

Before investing in Biotechnology companies it is important to have a clear understanding of the risks of investing in the sector, some of which are outlined below. However it is also important to note that these risks can be mitigated. Share market performance figures for the sector both here and in the United States indicate the importance of adopting a portfolio investment approach across the sector to reduce risk, while retaining exposure to high growth companies. Another option may be to invest in a listed investment company (LIC) that invests in a portfolio of companies in the sector.

Some risks to consider when investing in Biotechnology companies are:

1. Product failure: the possibility that a company’s product may not work in a safe and effective manner. This risk usually arises when products are being tested in clinical trials.
2. Lack of a commercial market: the risk that there will not be a demand for the product. This could occur for a number of reasons - There could be a negative reaction to the product from industry professionals such as doctors, or there simply may not be enough market interest.
3. Obsolescence: the risk that a company’s leading drug candidate might be rendered obsolete by another company’s product that may turn out to be more effective, easier to administer, or have fewer side effects.
4. Financial risk: It is very important that the company has the capacity to raise funds, as biotech companies burn cash very quickly and have the potential to consume large amounts of capital over a number of years. They need to have timely access to adequate cash to fund the commercialisation of their technology and for ongoing development.
5. Regulatory risk: The products of biotech companies are regulated by government bodies, and they must seek approval for any new medical products or services. Regulatory risk is the risk that a new product may not satisfy the stringent requirements for approval, or that the approval process takes longer than expected. There is also a risk that the company will not meet prescribed standards for manufacture and operations. In the case of new technologies, there is also the time required for the regulatory body to study the technology and determine how it should be regulated.
6. Protection of intellectual property: A lot of the value of a biotech company comes from the knowledge embedded in its patents. There is a risk that another company could legally challenge the patent. If a large pharmaceutical company challenges a small biotech company then there is a risk that the small company may not have the resources to defend and retain its intellectual property rights.
7. Licensing and collaborations: Many biotech companies seek to create licensing deals for their technologies with larger biotechnology or pharmaceutical companies. In doing this they receive license revenue and have the potential to receive royalties once the product reaches the market. There is a risk, however, that the larger partnering company may not have the same motivation to push the product to the market. This risk may be minimised if the partnering company has an equity interest in the smaller biotech company.