Biotechnology is associated to risks especially in food and drug development which often need governmental approval. However, if successful, life-saving treatments may be available on the market and substantial financial returns can be expected. Below are a few points to consider when investing in the industry:
Market opportunity: who does the product or service target – females over 50 years of age or anyone who has a car? What are the key obstacles that the firm may face? How many competitors are there already on the market and what makes the firm unique (competitive advantage)?
Scientific basis: analyzing and understanding how robust the scientific claims are. This is key and should not be overlooked or you may end up losing a lot of money. Aspects you should look for include peer-review publications (proof-read by other experts in the field), asking for expert advice, looking into the backgrounds of the scientists (degrees, endorsements, grants given).
Pipeline: essentially at what stage in the product or platform? If it is a drug/treatment or food it needs to be approved by a regulatory body prior to consumption to assess safety and efficacy. For example, a drug can take up to 10-15 years to hit the market and be commercialized. During that period, the biotech company will have huge research and development (R&D), management and marketing costs before any revenue is generated. Understanding what stage the drug development is at will allow you to predict the timescale needed before you can expect your investments to be returned to you.
Management: a successful company relies on excellent management skills and a wide palette of skills (scientific/technical, sales, regulatory, business development). Most importantly, this company’s goals and aims need to align with your own as an investor. Do you believe in their project and understand what they are trying to achieve?
Intellectual property: patents (commercial rights which mean third parties need to pay royalties to use the product, process or technology) are key selling points to investors who look for exclusivity. Having a patent may not be enough and often whether or not a business can use their patents without infringing on others is key. This is referred to as freedom of operation and highlights whether companies can commercialise their invention.
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Finance: is the company operating at a loss if so at how much? You will need to run down some numbers. Do you understand how they intend to become profitable and how you can expect your investments to be returned to you? Do they already have investors, shareholders and how much shares are possessed by the board or management?
Sales and marketing: once at the commercialization stages what are the company’s strategies? Even if a great product exists, without publicity and exposure it is likely to flop. Do they have strong social media presence, marketing agreements, exclusivity on the market (particularly relevant for orphan medication for rare diseases) and communicate with other industrial/medical bodies?