Biotech Companies

Biotech companies represent a particular challenge to spread betters or indeed traders of any type. They are a hot topic this year, with every week seeing a new biotech IPO (initial public offering). The fact is that there are different types of companies that can claim to be in the biotech field, and your approach to the different types must reflect the volatility and risk factors.

The label biotech can cover large drug companies such as Astra Zeneca, as well as a myriad of smaller companies based out of individual research labs, each trying to find a relief or a cure for particular health problems. While the health industry in general has some large sound companies, many of the smaller ones are fiercely dependent on their current research, including applications for approval of drugs for testing or commercial use. It only takes a setback or two for share prices to plummet.

On the other hand, once a drug has completed successful trials or is approved it earns its manufacturer substantial rewards, which can be reflected in a greatly increased share price. For a recent example, you need look no further than Prana Biotechnology whose shares soared 45% less than two weeks ago on news that its drug PBT2 was found to restore memory and learning in mice.  Prana’s work is still at an early stage, but the share price increase reflects the potential should the drug be developed to combat Alzheimer’s, as is hoped.

The other side of the coin is represented by Aria Pharmaceuticals which announced a couple of weeks previously that it was suspending patient trials due to some side effects that have been noted. Aria’s area of specialization is in cancer and leukemia drugs. Its shares plummeted to a quarter of their previous value.

If you are interested in looking for small companies that have a future, the best advice is to concentrate on ones that are researching hot topics such as cancer, diabetes, heart disease, tissue regeneration, etc. If the company has the attention of a larger drug manufacturer, who will collaborate and provide backing if necessary, then the question of whether the company can continue research becomes less important. However, ultimately the value is in whether the product can be brought to market as an effective drug, having received the necessary approvals.

The fact is that drug development and testing can take a long time, and while some advisors suggest that companies should have at least two years worth of cash in reserve, in practice even this may not be enough. If this is a concern, you might want to look for companies that have drugs in a later stage of development and nearing approval. This would also mean that the viability of the drug in treating the condition might be more certain.

To a lesser extent, the same factors apply when considering the larger biotech companies. While they may be expected to ride out rough periods, you will see similar effects on the pricing with approvals and announcements.

Finally, another way in which you could choose to spread bet on the biotech industry is in taking a view on which research companies are likely to be taken over or bought out by the majors. A working drug in a popular area can be worth a small fortune over its patented lifespan, particularly if it breaks new ground, providing relief in a way that has not been available before. The small biotech research company will become a target for big pharma, which needs to pursue constant innovation as existing drugs drop off the restricted list and become available on the generic market. Purchasing a ready made solution in the form of a takeover is an attractive proposition.