Investing in biotech stocks is an exciting opportunity, with the potential to capitalize on cutting-edge innovations like bacteria-based cancer cures, stem cell blindness treatments, and lab-grown meat. The biotech industry is at the forefront of scientific advancement, with scientists worldwide working on revolutionary products that could transform our lives and generate substantial returns for investors. This comprehensive guide will equip you with the knowledge needed to navigate and invest in biotech stocks effectively.

What is biotech?

Biotechnology is all about using living things to make products. It’s been around in agriculture for a while – companies like DowDuPont and Bayer genetically modify crops to make them pest-resistant or more nutritious. But the really hot bio-business these days is medicine.

Unlike traditional pharmaceutical companies, which use chemicals to develop their drugs, biotech firms manufacture their medicines with enzymes and bacteria. This can be much cheaper and easier than other techniques, and can allow for new kinds of treatment – whether those be long-awaited cancer cures or gene editing to cure hereditary diseases.

Why does that matter to me? For one thing, if you or your loved ones suffer from presently incurable diseases, biotech could come to the rescue. There’ll also be wider ramifications for society as new treatments for deadly diseases become commonplace – read our Pack on Investing for Aging for more on what a population that lives longer means for the economy.

The growth of the biotech industry

In recent years, the biotech industry has boomed: between 2000 and 2023, the total revenue of biotech companies in the Nasdaq Biotechnology Index rose by eleven times. And that growth looks set to continue: at a rate of almost 10% annually, over the next two years. Biotech is therefore a genetically modified field ripe with investment opportunity – and what’s more, you’re really helping keep the doctor away when you pick these apples.

But investing in biotech isn’t like investing in other industries. Convoluted research and development programs and strict regulations make it a hard sector to get to grips with. It’s also pretty high risk – so rushing straight in is not a good idea. In this Pack, we’ll provide a broad overview of the biotech sector and then give you the tools you need to analyze biotech stocks before taking the plunge. All your headaches will magically disappear…

The takeaway: Biotech is a fast-growing but risky industry with loads of investment opportunities.

What's unique about biotech?

Unlike software development or electric vehicle design, making complicated drugs using cutting-edge processes takes a really, really long time. The average drug’s journey from concept to creation is a whopping 12 years.

First of all, the boffins have to figure out the science – how to get a bunch of bacteria to behave the way they want, for example. Even if they do come up with a wonder drug, the process doesn’t end there. Governments are understandably wary about what citizens have crammed in their cannulas, and need to be convinced that new treatments are both safe and effective. Years of closely watched human trials ensue.

In the US (where the vast majority of biotech firms call home), this stringent process is overseen by the Food and Drug Administration (FDA). Clinical trials take place in three phases. The first takes around a year, and involves a very small pool of people who confirm the drug’s safety and dosage. Phase two takes a few years, and involves a few hundred human guinea pigs testing the treatment’s efficacy – and if there are any nasty side effects. If a drug makes it through those stages, the third and final phase takes another few years: thousands of test subjects help scientists evaluate the drug’s long-term impact.

The whole process takes forever, and failure is all too common. 85-95% of all prospective drugs fail to be approved by the FDA, which can really kibosh a company.