Growth investing typically is owning stocks that have the potential to outperform other asset classes and nowhere is this more evident than investing in biotech stocks. While the rewards can and have been high, this is not for the faint of heart.
Since this summer”™s July high point the Nasdaq Biotech index is down more than 30 percent, dropping from 4195 to 2747 and prompting investors to ask: Is there a lot more downside or is it a buying opportunity? Like most of investing, it depends. It depends on whether you are an active trader or a long-term investor. Historically long-term investors in biotech have been rewarded for tolerating the swings like we are seeing now but of course that doesn”™t mean you”™ll always experience growth over time. So to take a balance look at this exciting sector it”™s important to look at the good and the bad in the sector today.
First the good news. Innovation is a force that continues to drive growth, especially in the biotech area. Creative destruction is a term made popular by renowned capitalist Joseph Schumpter to describe the constant progress that makes some technologies obsolete. As old products stagnate, demand gives rise to new goods and services, methods of production and new consumers. Indeed, we”™ve shifted over time from the industrial revolution to the digital revolution. Products change so fast that opening a flip phone these days will likely earn you a smirk and you”™ll likely not find many phone booths these days.
New trends and products open up big new markets. As we have a better understanding of human genetics and physiology, researchers have used this knowledge to change the drug discovery process. This has led to targeted drug therapies, preventive medicine and new procedures like minimally invasive surgery. As 10,000 baby boomers a day turn 65 the demand is likely is relentless.
However, while the breakthroughs are fascinating, the investment by biotech firms is enormous and results are difficult to predict. To investors that”™s the bad news. According to research conducted by The Independent Institute, just 8 percent of drugs make it through concept, development, clinical trials and FDA approval. Some estimates, like those conducted by BrightFocus foundation, put the cost of bringing a product to the marketplace at $1 billion.
Also of particular importance is the upcoming election. There is likely to be caution on the part of biotech investors fearing pricing pressure as policy makers look to offer proposals to regulate pricing rules. Late last year one company, Turing Pharmaceutical, increased the cost of their 62 year-old AIDS and cancer drug Daraprim from $13.50 a pill to $750 overnight, sparking outrage and demands for better policies. While this is an extreme example, rising healthcare costs are high on the minds of pre- and post-retirees and they have the ears of politicians.
Locally, a recent proposal to build a $1.2 billion biotech and medical complex in Valhalla has gained a lot of attention. Westchester County Executive Rob Astorino stated the county would benefit to the tune of 8,000 permanent jobs and 4,000 construction jobs. Biotech jobs could interest younger highly educated workers that the area is trying to attract and is a further example of investment ideas both directly and indirectly in the sector.
Investing in biotech stocks has been a volatile ride and that”™s not likely to change anytime soon. The short term should be left to those who wish to trade actively and are comfortable with sizable losses. However, the long-term outlook is one that embraces innovation and the biotech sector in many ways makes life better and longer. Consider putting a small portion of your long-term growth assets in the sector and diversify. There are many mutual funds and exchange-traded funds that can provide access if you aren”™t comfortable picking a few stocks yourself. While there no way to predict the future, if you see innovation as a driver of growth biotech shares are a lot cheaper than they were six months ago. For local investors, that makes it well worth the time spent researching the researchers.
Christopher P. Jordan is the founder of LEXCO Wealth Management Inc. with offices in Tarrytown and Greenwich. He has been advising affluent families in the area for the past 25 years and specializes in retirement transition. He can be reached by phone at 914-468-8912 or by email at cjordan@lexcowealth.com.
