Investing in biopharma stocks can leave investors enjoying enormous returns thanks to the explosive growth sometimes seen in the space.
Biopharma companies are a sub-sector within the healthcare sector and are concerned with the development and production of medical treatments using biological sources.
Essentially, that means these are businesses which engage in activities like stem cell therapy, gene therapy and vaccine development, as well as much more besides.
But how do biopharma companies perform on the stock market and how could they boost your portfolio?
Positives of Biopharma Investing
A large proportion of publicly traded biopharma companies are small, loss-making and have yet to bring products to market. On the face of it, this doesn’t exactly sound promising for investors.
However, this is actually a key part of the sector’s allure. The companies are plentiful and their stock tends to trade cheaply, but success stories and even just the hitting of important milestones can send a biopharma company’s share price rocketing higher.
For example, shares in Applied DNA Sciences (NASDAQ: APDN) leapt from a price of less than $0.70 each to around $5.75 in the space of just a few days at the start of August 2022, following a step forwards in the business’ monkeypox testing efforts.
This can offer investors the chance to cash in on an investment before a company has even made it to market.
Of course, there are biotech companies that enjoy enormous success across the long term too. Some businesses that fit this mould include:
Vertex Pharmaceuticals (NASDAQ: VRTX)
Jazz Pharmaceuticals (NASDAQ: JAZZ)
Biomarin Pharmaceutical Inc (NASDAQ: BMRN)
These companies have each seen their share prices grow enormously from humble beginnings, giving huge returns to the investors who got in on the act at an early stage.
Biopharma Investment Risks
While the previous section demonstrated the dramatic leaps in share price that development stage biopharma stocks can exhibit, the opposite can happen too. For example, July 2021 saw Ardelyx Inc’s (NASDAQ: ARDX) share price plummet from more than $7.50 to around $1.60 in just a few days.
This came after the business revealed that the US Food and Drug Administration had raised concerns about deficiencies in a treatment for adult patients with chronic kidney disease, which was at the time the subject of a new drug application.
Additionally, the high concentration of development stage companies in the biopharma sector carries further intrinsic risk. That’s because some of these businesses may never successfully bring their products to market due to funding or regulatory issues.
As such, they may never yield significant revenues or shareholder returns.
This risk can be avoided or lessened by picking commercial-stage biopharma stocks or companies that are very close to completing clinical trials.
It can also be difficult for investors to fully understand a biopharma business and its chances for success, especially if the company’s materials employ a high degree of scientific jargon. Biotech and biopharma companies are often working on complex and innovative projects which may be difficult to understand for anybody who is not an expert.
Even so, investors should always make sure they understand the business, its product and why a market exists for the product.
An extreme example of biopharma complexity turning sour can be seen in the case of Theranos. This business attracted more than $700m in funding from private investors thanks to its revolutionary blood testing technology.
However, experts subsequently debunked Theranos’ claims about its technology, leading to the company being shut down and several members of its leadership facing fraud charges.
Biopharma Market Outlook
According to Statista, the aggregate value of the global biopharma industry increased from $1.99trn to $7.15trn between 2003 and 2021. The same source projects that the market could grow from $345.8bn in 2021 to $974.5bn in 2030.
However, the industry currently faces significant challenges.
For one thing, the current economic difficulties make it challenging for businesses to access funding. For biopharma businesses that are still at the development stage, and are therefore heavily reliant on outside investment to keep projects moving forwards, this increases the risk that they could run out of money.
According to RSM, M&A and IPO activity in the sector has been significantly lower across 2022 than in previous years, though it also noted that the largest 30 biopharma companies are holding around $87bn in cash.
With some businesses likely to be struggling for funding options, this could mean a spate of M&A activity is on the way for the sector.
Biopharma ETF Performance
Of course, one stock is not indicative of a whole sector’s performance. That’s why examining the performance of Biopharma ETFs might offer a little more insight into how healthy the sector is and what the best approach might be.
Biopharma and biotech ETFs like the SPDR S&P Biotech ETF (NYSEARCA: XBI) and the iShares Biotechnology ETF (NASDAQ: IBB) appear to demonstrate the sector performed very well through the height of the pandemic but has since fallen away.
The former hit its highest point in February 2021 but has fallen in price by roughly 40% across the last 12 months at the time of writing.
This could indicate that biotech and biopharma stocks were at the peak of their popularity when healthcare, and particularly vaccination, was on everyone’s mind during the COVID-19 pandemic. However, interest in the space appears to have waned amid the emerging economic challenges of the past year.
Should You Add Biopharma Stocks to Your Portfolio?
It’s readily apparent that biopharma stocks carry strong positives and negatives for prospective investors. Bearing this in mind, we can build a picture of the investors who are best suited to investing in biopharma stocks.
Key among the qualities required for investment in biopharma should be an appetite for risk and a willingness to research, particularly for development-stage businesses. It’s key to understand what the company does, as small biopharma outfits are hugely reliant on the potential of their products.
Their high risk means they are inherently suited to comprising part of a balanced and diversified portfolio. You might be lucky enough to strike gold with your biopharma investment, but spreading your funds across a variety of investments will ensure that all is not lost if the biopharma outfit you backed fails to get off the ground.
