Three ways to separate long-term winners from stocks that fizzle.
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Many believe it takes guts to invest in biotechnology. Like any cutting-edge industry, huge potential upside mingles with potential disaster. Shares of Irish biotech Elan
However, a quick glance at the 2005 performance of the Amex Biotechnology Index (BTK) shows that this basket of biotechs had an annual return north of 25%. How can individual investors tap into biotech's potential without being obligated to pounce on any bit of clinical data that dribbles out of a company?
Investor myopia makes the performance of many biotech stocks highly volatile. With a focus on short-term performance, investors regularly overreact to both positive and negative news, trading in and out of stocks in an attempt to get a big return when clinical trial results are announced. Here we suggest three key qualities to look for when selecting biotechs as long-term investments.
1. An Established Competitive Advantage
A diversified toolbox is the first clue to a biotech's competitive advantage. If a company only has the tools to create one type of drug, the range of applications for these drugs will be limited. Too much reliance on a given technology or therapeutic area also reduces a company's ability to adapt to future changes in the market. As competitive forces shift, technologies can become obsolete and markets that were previously highly profitable can become fiercely competitive. Many larger biotechnology companies such as Amgen
That said, there are a few established biotechs that have chosen to specialize in one therapeutic area and have managed to stay on top despite heaps of competition. Gilead's
2. Attractive Fields of Research