Crunching the numbers of biotech companies isn’t easy, but there are a few pointers that can help you make a more informed decision about which bets might win out.

What kind of disease is the company targeting?

Biotech is split into mass-market and “orphan” drugs. The former target the big diseases – cancer, diabetes, heart disease – that affect a large number of people. Companies focused on these areas could see higher sales, but also face increased competition – which could drive the price of their drugs down.

Orphan drugs, meanwhile, target rare diseases that affect fewer than 200,000 people in the US. That rarity means companies can charge much more for the drugs (with government subsidies available too) and get help with development (such as tax credits and longer exclusivity periods). Both types of drug can make money, but orphans are less likely to win big.

What type of product is the drug?

Vaccinations offer a fantastic preventative solution, and will often be taken by more people than a treatment will be. But they’re a single-use product; treatments are often valued more by investors because they offer an ongoing revenue stream that can bring in more money in the long run.

How much is the firm spending on R&D?

If you’re looking at companies that already have products on the market, a good metric to track is the amount they’re spending on research relative to their revenue. The few companies that earn more than they spend are stable investment opportunities – but have less chance of growth than those feverishly reinvesting their earnings.

How much money’s in the bank?

For the many biotech firms that don’t have revenue, what really matters is whether they’ll be able to survive the long clinical trial process. Doing so requires a lot of funding – and what you don’t want is for a promising drug to fail because the company’s run out of cash.

If a company doesn’t already have enough cash to cross the finish line, they’ll need to raise more at some point. That may well involve issuing new shares – which could dilute your shares, giving you a smaller piece of the pie come payday. While you can help avoid dilution by waiting until a company’s raised more money, you’ll be jumping on towards the end of the growth curve – and may not profit as much.

What’s the debt like?

Companies who don’t raise all their money from stock investors might have taken out loans or issued bonds instead. And while that might be fine for now, if there’s too much debt on the books then any funding they do have could get frittered away paying off those debts – especially if interest rates rise.

You’re now inoculated with the financial factors to look for at biotech firms. Next, we’ll give you a shot at putting that knowledge to use – and actually getting invested in biotech.

The takeaway: Thinking about companies' drug strategy, debt load, and R&D costs can help you pick a good biotech stock.