The biotech sector – always a good investment?

Overall, the last few years have been consistently positive for the global economy. Since the economic crisis of 2008/2009, we have experienced one of the longest-lasting boom phases ever. The biotechnology sector has also been part of this positive development and has even shown significant growth rates in some areas in recent years. It is therefore time for us to critically examine this development. Biotech Overview: Biotechnology can be found in agriculture and industry, but medicine is by far the most promising branch of industry. The sector is also characterized by numerous acquisitions. For example, the planned takeover of Celgene by the US corporation Bristol-Myers Squibb (for around $74 billion) marks a new high point in the pharmaceutical industry. In summary, biotechnology is one of the most dynamic sectors. Investment Opportunities: Investors have various options for profiting from biotech stocks. On the one hand, it is possible to invest directly in young, promising companies. Profits are possible if these companies are successful with their research or if they are acquired by larger corporations. Alternatively, established companies offer a somewhat less volatile investment opportunity. Third, there is the opportunity to participate in the overall success of the industry by investing in suppliers to research-based companies. Finally, special funds can also be interesting for investors, as they invest their capital broadly in the market and thus spread their risk across many stocks. One advantage of German biotech companies is that they are significantly cheaper than US stocks. And the problems? One argument against buying shares in young companies is that approximately 85 percent of all drug developments fail before approval. Investors therefore have a 15 percent chance that their investment was the right one when purchasing a single share. Small, innovative companies in particular therefore pose a high risk. In addition, biotech companies have high costs for the research and development of their products, and it usually takes a very long time until the first market launch. Investors therefore need to be patient. Furthermore, there are risks involved in investing in special biotech funds. In general, fund investments enjoy a reputation for being lower risk because funds diversify their risks more widely. However, a large proportion of funds invest primarily in US biotech companies. This is problematic, on the one hand, because effective risk diversification is only possible through broad regional diversification. On the other hand, it means that the fund is primarily invested in US dollars. European investors are therefore exposed to exchange rate risk when investing in these funds. In any case, it is worthwhile to carefully examine the composition of a fund. Ultimately, an investment must also be weighed against the backdrop of the fact that the current positive economic phase has already lasted quite a long time and that signs of a negative development in the stock markets are increasing. In addition to the upcoming Brexit and the simmering trade dispute between the US and China, there are other crises that could negatively impact the economy. To date, smaller biotech companies in particular have been relatively independent of the general economic situation in their development, as their value was primarily derived from the potential success of their research. It will be interesting to see whether this countercyclical characteristic will persist in the next crisis!