How to Select a Biotech Stock

Biotech stocks have the potential of tremendous rewards if you pick a company with a product that makes it big.

What is Biotech?

Biotech companies manufacture drugs or other products using genetic engineering.  Most of these companies are started with some solid idea to come up with some winning product.  Examples are cure for Cancer, AIDS etc…  There are different points to analyze a biotech company.  It is much easy to spot a common stock like Wallmart, Google or Microsoft. Every Biotech or pharmacy company has to pass many hurdles before they come up with a successful product in the market.

Generally biotech firms can be divided into three sections: Large-cap Pharmaceuticals, Mid-cap, and Small-cap biotech companies. The large-cap section actually includes the large biotech firms; GlaxoSmithKline, Pfizer, Merck etc…

Special Issues of Biotech Stock?

Food and Drug Administration (FDA).

All new drugs must go through a lengthy testing and approval process supervised by the Food and Drug Administration (FDA). Each drug must complete three sets of clinical trials called Phase I, Phase II, and Phase III, typically running 18 months, two years, and three to four years, respectively. Products successfully completing the clinical trials are submitted to the FDA for marketing approval, a process usually taking one or two years to complete.

Given these timeframes, it’s best to focus on companies with at least two products in phase III trails or awaiting final FDA approval. More is better, and you want companies with a steady stream of products in all testing stages.

Burning Cash

Most biotech firms have few, if any, products already on the market generating income. Companies without income to cover expenses are said to be “burning cash.” Analysts often compare a company’s assets to its “burn rate” to determine how long the company can survive before running out of cash. They say it’s better to stick with companies with a least two years supply of cash on hand.

Partners

Most biotech products sound promising. However, it’s difficult to know if there are better competing products in the pipeline, and the size of the potential market even if the product is successful. Small biotech companies usually form partnerships with large pharmaceutical firms to market their products. The existence of these partnerships means these in-the-know companies think highly enough of the product’s prospects to take on the marketing.