What is the market risk of biotechnology investments?

Answer 1

Investments in biotechnology stocks can viewed as the classic high risk/high reward proposition. Many biotechnology companies are engaged in research related to new drug development and do not yet have products, sales, or profits. In addition, if a biotechnology company actually succeeds at developing a new drug, there is a prolonged period of time required for clinical trials to prove the drug's efficacy. Many drugs that look promising in the lab wind up as failures during the testing phase due to side effects. Before a new drug can be marketed it must be approved by the Food and Drug Administration (FDA) which sometimes can demand additional clinical tests. The immense amount of research required for new drug development is very costly and start up biotech companies have to constantly raise cash to stay in business.

The reason that investors are willing to put money into a high risk business like biotech is because the rewards for success can be immense. Successful new biotech drugs typically produce huge profits resulting in a soaring stock price. One example of such success in Amgen which has come up with a variety of successful new biopharmaceutical products. Early investors in Amgen stock are now millionaires many times over.