Biotech Investment: Should You Invest in Current Successes?

Biotech investment often offers the greatest opportunity for large capital gains. When biotech companies are first starting operations, they often have little more than a theory and an experiment designed to prove that theory. This means you can get into the investment for a very low price. Once the experiment works, though, there is nearly limitless expansion for the profit of the development, particularly if it involves medicine, energy or other necessities on the marketplace. The chance to turn a large profit is clear if you get in at the beginning, but what about investing in a biotech that has already proven to be successful?

Guarantee of Profits

On the one hand, investing in a successful biotech company can be much less risky than investing in a start-up. The company has already proven its technology works and, in most cases, proven there is a market for the technology. This provides you with financial reports to consider and nearly immediate dividends or gains on your investment. It also offers more guarantee against a drop in the stock's price if the company fails to execute its designed plan. 

Financial Stability

If you evaluate the profit projections for a biotech company, you will see the initial years of research and development are the most costly and the least profitable. This is followed by a short period of limited profits when the technology is first offered to the market. The company is still investing in machinery and expanding its operations, typically operating at a loss. It is not until the company has finally saturated the market with its product that it can pay off the years of debt owing to developing a patent, and this is where you would step in as an investor. You would have a much higher guarantee of financial stability investing in the company at this point instead of in its initial operations. 

High Price

Unfortunately, if you invest in a biotech company after it crosses the hump into profitability, you will have to pay the premium for its early success. The initial investors get in at a very low price because the market is still uncertain. Their risks pay off when the company succeeds. If you do not take the risk, you cannot expect the same payoff. You will have to get in at a higher price, and you will have a lower return on investment as a result. 

Limitations on Patent

A final risk in investing too late is the chance the company's patent will be nearing expiration. The United States assures patents on biotechnology expire in due time. The company hopes to develop a market foothold prior to this time, but other biotech developers will be hot on the tail of a patent that will soon expire. At that time, the price of the original company's stock will drop sharply. If you invest within a few years of this time, you may see falling profits for a short period of time up to a decade before the market decides whether the original development has a permanent place after its patent has expired.

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