Biotech is an inherently complex industry, yet one with huge returns for impact-oriented investors. Drug development may take decades and the majority of products never make FDA approval.

Financial factors, such as how much companies spend on research vs revenue, can help pinpoint winners. Another key consideration is what diseases these drugs target – mass market medicines often generate greater sales but may face increased competition.

Drug Development

Biotech held great promise as an innovation-based alternative to established pharmaceutical firms’ patent expirations and falling profits, but biotech remains vulnerable against disruption by disruptive forces such as software. The original promise of biotech was that a new breed of entrepreneurial businesses would revolutionize R&D and produce an abundance of profitable new drugs – thus serving as an important counterbalance against their dwindling patents and diminishing profits.

Investors must consider how much a firm spends on research relative to its revenue, and whether any of its profits go back into research development pipeline. Failure on R&D side could cause stock price to plummet significantly.

The industry also faces several hurdles related to clinical trial processes that may take years and be costly, making investing difficult. Investors should focus on firms with proven results and an in-depth knowledge of scientific processes involved, and that conduct their trials responsibly; such as including control groups in early phase trials to reduce placebo effects.

Research and Development Costs

Early optimism around biotech was buoyed by high hopes, including genomics, combinatorial chemistry, and other breakthroughs that promised revolutionary new drugs at lower costs than existing alternatives. Companies would monetize their intellectual property to reap huge profits for investors.

Realistically, however, biotech firms have struggled to make any significant profit, while most never generated significant revenues. Even companies that have working treatments available on the market often invest their profits back into research; as a result, biotech investments tend to be risky investments.

Investors need a more complete picture of the development costs associated with new drugs. Public markets were never intended to accommodate enterprises engaged in R&D; as such, valuing them based on earnings is difficult and their investment prospects must also be assessed appropriately. Furthermore, due to lack of standard data on development costs comparing estimates is an additional difficulty factor; investors require better knowledge to assess these expenses accurately and fully understand them before investing.

Market Competition

Biotech markets are highly competitive; companies making strides toward creating drug candidates may attract the interest of larger pharmaceutical firms that could acquire them and take them forward.

Biotechs may take an alternate approach by developing their drug through clinical trial completion and selling it off to large pharma companies for upfront cash and future royalties in exchange for de-risked development and marketing costs. Although this strategy is riskier, if successful and profitable it could yield big rewards.

However, biotechs with retained assets may find it easier to secure private investment and find partners with complimentary skill sets due to current funding environment constraints. Private investments have become more selective; those who rely solely on being acquired by larger pharma must carefully manage burn rates and plan long-term financing strategies in order to remain financially sustainable.

Financial Position

Producing biopharmaceuticals can be costly. To assess whether a company is financially sound, investors should evaluate any debt that needs paying off as well as how much cash is in its possession.

Biotech companies often take years to develop and commercialize a drug, which requires selling many shares to raise the necessary capital for development. Because selling shares dilutes their value, it’s crucial that one knows just how many have been sold by any given company.

As well, the banking crisis caused investors to lose faith and reduce available capital for biotech startups. Venture capital funding is currently at its lowest levels since 2019 so early-stage biotechs may find it more challenging than before to secure funding necessary to survive – potentially increasing the appeal of acquisition by larger pharmaceutical firms as investors look for diversification among investors as well as taping into an expanded pool of expertise.