Getting started
Buying a stock in general is a difficult decision. Will it go up? Down? Flat-line? Squiggle around in a chart on that one website I saw? The list of questions goes on. Some people can be paralyzed by the prospect of looking at a stock, much less buying one. All those different graphs and opinions! Doesn’t have to be that difficult. Having useful information and research behind you can push you in the right direction.
What is biotech?
Biotechnology has been around for thousands of years. It’s when someone uses living organisms to develop or create products. Some believe that the definition of biotechnology even extends to just simple agriculture: growing food! Some start with the making of beer.
Now while you may know that one guy who will forever be claiming he’s a biotech engineer because he makes craft beer, in modern times, biotechnology usually refers to creating medicines or using technology to solve a wide range of medical issues in the 21st century.
Why the biotech industry?
Investors who look at stocks almost always take into consideration the industry itself. Where’s it going and where’s it been? If you’re buying an oil rig, you check the price of oil, car sales, etc. You find out what’s moving in the economy.
Much, though not all, of the biotech industry rests on the fact that disease, sickness, and aging are still a part of life. Right now at least, someone, somewhere, is unfortunately going to be well. Someone else, fortunately, is always going to try to solve the issue. Biotechnology is at the forefront of solving these pressing medicinal and age-related issues, which is why the industry is worth taking a look at.
What about the Index?
A study by BTA on the extent to which the returns of individual stocks in the Nasdaq Biotechnology Index (NBI) are correlated to the return of the index itself, shows that these two are not correlated to any statistically significant degree. What does that mean?
It means that biotechnology stocks rise and fall over the long term according to other factors, and not because of the overall index, leaving the investor two options: 1) buy the index if they feel the entire sector will do well in the future or 2) focus in on a stock. Let’s tackle number 2.
How to look at a biotech stock
First rule: what’s the product/service?
Find out what they’re selling. No one wants to be left owning the Brooklyn Bridge. So it’s important to know what a firm is trying to do. See if you can reduce what they do to one to three sentences in your head. If you can’t, the chances are you don’t understand it yourself, and should probably take a look again. For instance, look at BTA’s sample monthly newsletter on Anavex:
“1. Anavex is a biotechnology company whose Alzheimer’s products… focus on triggering a specific protein receptor (sigma-1), which naturally reduces the number of malformed proteins in the brain that increase in number as people age and which may contribute to Alzheimer’s disease.”
Clarity is key. Know what you’re buying.
Second Rule: Why create the product/service?
It’s great to be able to develop new products like hypochlorous acid. But then again, if the company is creating this product because they believe that hypochlorous acid can prevent a Martian invasion because Martians are allergic to acid, then it might not be a good idea to put your money into that company… unless you believe that a Martian invasion is imminent and that hypochlorous acid can prevent it.
Otherwise, it’s important to look at the market for the product. Remember one of the oldest laws of economics: you can supply all you want, but if there is no demand for a product, you will go nowhere. So let’s look at Anavex again. What’s the market?
“One significant market is the Alzheimer’s market, which represents an increasing proportion of the U.S. population. The number of people with the disease is expected to be triple its current value (5 million) by 2050. Furthermore, none of the currently approved drugs on the market that treat Alzheimer’s have the capability of curing the disease, only of reducing its symptoms. The market for treating this disease therefore has enormous medicinal and investment potential.”
Nice. We’ve done our research and now are informed about what Anavex does, and what its market is.
This is one of the points at which you, as an investor, have to stop and think. Do I think this product is a good product? Do I think that the Alzheimer’s disease is a growing issue? Essentially: do you believe in this product?
Obviously, belief in the company is important, but that doesn’t guarantee that the company will succeed. In other words, we’re not done yet.
Details, details, details…
From here on out, it gets sketchy. Different firms have different strengths, but here are some good tips to keep in mind as you focus in on that biotech that you like:
- Look at the management. Are the CEOs or board members knowledgeable, educated, and experienced in the biotechnology sector? Are they doctors or scientists themselves?
- Who are the researchers creating and developing the product? Are they devoted to the idea? Has there been any conflict between researchers or between researchers and management?
- What are their sales like so far? What are their projected sales?
- How financially stable is the company? Do they have enough funding to pass the next phases of their trials? Are they in the process of obtaining more funds?
- How successful have they been so far in testing? How many trials have they gone through?
While different biotech firms will have different answers to these questions, it’s important to bring them all to the table. Once again, they may not all apply. A company with plenty of funding may have a horrible product, or a company may have the cure for cancer but no cash in the bank. These are decisions each individual investor has to weigh themselves. The first step, however, is knowing which questions to ask.
And for those of you who want an update on Anavex Life Sciences, when Bell Tower Associates released their monthly newsletter, it was at $0.24. Check its trading price now.