By Joshua Mazher, Biotech Equity Analyst
Investing. If this word evokes fear in your heart, just know that you are not alone. For many, the act of investing is akin to walking across a tightrope, with only hope and a bit of luck keeping one from plummeting toward the depths of financial despair. With so many options out there, it can be challenging to know where and when to take the first step, much less survive the course and make it to prosperity. Well, I’m here to tell you that with a little bit of research, diversification, and patience, investing will be one of the simplest and most rewarding ways to make profits, all while taking factors such as luck and bankruptcy out of the equation.
Let’s say you have 10 thousand dollars lying around and are ready to take the first step towards investing it in something that is sure to grow. You’ve heard countless stories of the market’s volatility and just want to be sure that your ten thousand dollars will be able to only grow, without ever having to worry about losing money. To accomplish this, you would need to invest in a market that is continually expanding, has the capacity to always improve upon itself, and is able to withstand the ever-growing climate of both technological and social changes. Does such a market exist? Enter, biotechnology.
Biotechnology is the perfect market to invest in for a multitude of reasons. For starters, its whole essence relies on research and development. The more a biotech company is able to develop new drugs in its respective pipeline, the better it will perform. As an investor, research and development should be a key component in deciding which companies to invest in because it serves as a benchmark for future success. If a company is pouring in a lot of its on-hand cash in maximizing its research and development for products, it increases the chances of a breakthrough, which brings me to my next point.
Another reason to start investing in biotechnology is its capacity to continually make breakthrough products for the sake of human survival. It’s no secret that perhaps the most important products in the world are those that are designed to help one live for as long as possible. At its core, biotech provides solutions to help people fight off death, consequentially making its drugs the most sought-after products ever created. This means that there is essentially unlimited demand for newer and better products, meaning that biotechnology will inevitably continue to churn out improved products one after another. This in and of itself means that there is really no way to “lose” money when investing in biotech… as long as you are minimally investing a large portion of your money in the companies that reflect the market the most.
So we have established that as a whole, biotech is the perfect market for which there is always an incentive to create improved products, while never running out of demand. With that out of the way, how should one go about investing 10 thousand in a biotech portfolio? I recommend any beginner investors out there follow this basic structure: 50% Big Pharma ETF, 30% Biotech ETF, and 20% Individual Biotech Stocks.
Big Pharma, Big Profits
Big Pharma ETFs (Exchange Traded Funds) would include a bundle of stocks from the largest pharmaceutical companies in the world. Examples of these mega companies include Pfizer, Johnson & Johnson, BioNTech, and Roche. These companies have some of the most equity in the world, bringing in billions of dollars annually. As is oftentimes the case, Big Pharma companies tend to partner up with smaller biotech companies in order to take advantage of the next new innovation, meaning that the trajectory of these ETFs is almost certainly going to be an upward slope for as long as the biotech world continues to pump out new products. For you, the investor, investing in a Big Pharma ETF would ensure profit dividends within the time frame of 5 to 10 years. As I mentioned previously, biotechnology is a market that has an unlimited capacity to improve upon itself, and an audience that will always purchase the next new product if it means adding a few extra years to their own life.
The largest Big Pharma ETF as of 2023 is $PPH, otherwise known as the VanEck Pharmaceutical ETF. PPH has a weighted average market cap of $151.37 billion dollars alone, making it one of the most dominant ETFs in the world. This means that the average company in this basket of stocks is worth $151 billion dollars on the open market. These are substantial, established companies. As someone looking for the safest option to ensure profits within a five to ten-year timespan, this ETF will be your best bet. Notable companies in this ETF include Eli Lilly & Co., Novo Nordisk, and AstraZeneca. If have any prior experience of research into biotech companies, it is likely that you have heard about these companies at some point or another. Going back to our model, 50% out of your $10 thousand would equate to $5,000 that you should invest into an ETF like PPH.
Biotech ETF’s, A Fountain of Innovation
Moving on to the next component of your biotech portfolio, let’s take a closer look at the Biotech ETFs. Perhaps the breadbasket of innovation, companies from a biotech ETF will typically spend a majority of their on-hand cash and expenditures on research/development of products designed to help aid diseases and problems that affect our everyday lives. Areas of particular interest in the 21st century are oncology, immunotherapies, cell diseases, etc. That said, breakthroughs don’t arrive every other week and often involve a number of clinical trials and processes before a product can reach the surface. Thus, these ETFs will tend to be a bit more volatile in nature, and one can expect to see fluctuations in price regularly. However, it is important to note that this “volatility” should not discourage an investor looking to test the waters of the biotech world. Patience is key in this regard, especially since the time frame that we are looking at is at a minimum of five years.
There are a variety of options when it comes to choosing biotech ETFs to invest in, with some including but not limited to SPDR S&P Biotech ETF $XBI, iShares Biotechnology ETF $IBB, and Virtus LifeSci Biotech Products ETF $BBP. Each of these funds is comprised of notable biotech companies that have made massive strides in the past decade including Vertex Pharmaceuticals and AbbVie – both of which have been instrumental in discovering solutions for chronic illnesses like cystic fibrosis and rheumatoid arthritis. While these ETFs certainly don’t have the same magnitude as the Big Pharma ETFs, they are instrumental for diversifying your portfolio and ensuring that you receive returns from companies with a history of creating innovative new products each decade. For reference, XBI has a weighted average market cap of $13.7 billion, with an estimated 4.76% 3-5 year EPS growth rate. For reference, the weighted average market cap of an index refers to the mean market capitalization value (sum of all a company’s shares multiplied by the price of the share) of all the companies in the index.
As is a common theme in biotech investing, you should be focused on investing, not day trading, meaning that you should expect to hold your investments for at least five to ten years. This will provide the maximum returns for you and will keep you safe from volatility bias. 30% out of your $10 thousand would equate to $3,000 that you should invest into biotech ETFs such as XBI, IBB, BBP, etc.
The Few, The Proud, The Individual Stocks
Finally, the last segment of your portfolio should include individual biotech stocks. At this point, you should have a more comfortable understanding of the biotech world, and have more confidence in your own biotech decision-making abilities. Whereas the majority of your investment will be in relatively safe hands in the ETFs, investing in individual companies themselves can reap the most rewards… or losses. Going into this process, it’s important to realize that picking individual stocks is never a guessing game, but rather an informed decision. This means that preliminary research is MANDATORY if you want to expect the best results. The best way to do this is by keeping up with the latest trends in the biotech industry. This is far easier than one might expect, and you certainly don’t have to delve into several peer-reviewed publications to figure out which companies are best to invest in for you. All you need is a basic understanding of the status quo of a trendy healthcare topic, and then discover the companies that have the most headwind in terms of developing a product designated for that particular problem. For example, as of August 2023, the world of oncology is experiencing massive traction, with news about successful clinical trials appearing every other week! However, most analysts predict that the drugs won’t be commercialized until 2030 at the earliest. Patience is key.
If you’ve paid attention to this article up until this point, you know that 2030 fits right in the middle of that five to ten-year span, meaning it is a great time to invest in biotech companies that are having the most success in developing cancer treatments. This is just one example of the many different types of healthcare fields that are experiencing a surge of development. Keeping up with the model, the remaining 20% of your $10,000 leaves you with $2,000 to work with. This gives you room for picking anywhere between 5 to 15 different biotech companies that are leading the field in their respective pipelines. Something to take into consideration is that when investing in individual biotech stocks, you will naturally experience the most volatility, with daily fluctuations. At this point I’d like to reemphasize a point I’ve made previously: You are investing, not day trading! It is paramount that the daily volatility doesn’t affect your understanding of the broader trends that are developing. In the age of the internet, identifying trends that biotech experts believe will manifest themselves within ten years is a quick Google search away, so take advantage. For reference, you can check out my other articles discussing cancer vaccines and the liquid biopsy revolution for ideas on companies that you can include in your portfolio. Also, you could check out our sickpicks, right here.
Remember, this website and others can provide investing ideas, but you must commit to doing your own research if you want to reap the full benefit owning individual biotech companies.
By this point, you’ve hopefully gotten a glimpse of the possibilities of including a biotech portfolio in your list of investments. Through the highs and the lows, one thing remains the same: biotechnology is always present. Whether the world is going through a depression or an expansion, the value of human life will always keep biotech up and running.