What Investors Need to Know When Investing in a Bio Tech Company
Many investment companies invest a lot of money in some of the groundbreaking innovations in the biotech sector, thinking of the huge returns they could get which other industries do not offer. While investing in the biotech sector can be fruitful if the products are truly breakthrough innovations, investing in this sector could also be risky. There are a few things that investors need to know before investing their money in a company:
- Investors need to know the requirements of the FDA thoroughly. The FDA is considered to be the final gatekeeper; hence the success of every company is in the hands of the FDA. The basic requirement for biotech firms to get approval from the FDA on their innovation is, to establish that the new product is safe for the purpose it was created. To do this, companies have to go through three phases of clinical trials. Only after the drug has passed all the three clinical trials, it will be approved by the FDA. The biotech companies are expected to file a formal request for approval from the FDA. Once the FDA receives the application, it assigns a PDUFA date (Prescription Drug User Fee Act) which is nothing but a deadline by which the company will know about FDA’s decision on the approval of the new drug. During the process of reviewing the investor application, FDA involves the advisory committee to get their opinion on whether the new drug should be approved or not. After getting an opinion from these experts, FDA makes its final decision. If it gets a positive opinion from the committee, it will permit the biotech company to roll out the new drug. If the panel of experts shared a negative view about the drug, FDA would reject the drug by issuing a CRL (complete response letter) to the company wherein they will ask the company to gather more facts, then apply again later.
- Another thing that investors needs to keep in mind is the pipeline that the biotech company follows. The pipeline is considered as the prime source of the company’s estimated value. While investing in a single-drug can be good, it can also prove to be very disastrous if that one product that the investor has put all their money on fails miserably. It is always wise to invest in companies that have more than one drugs in Phase II clinical testing.
- While investing in companies that are testing drugs for some of the major diseases is considered to be the ideal thing, investors need to keep in mind that the expectations for these drugs are hard to meet. So investing in 5111 Orphan Drugs’ which are nothing but drugs that are being tested for less-common diseases can result in a huge revenue if the tested drug rolls out beautifully.
- Understanding the corporate philosophy of the biotech company that investors are investing in is also essential. While some biotech companies market the drugs themselves by building their own sales force, a lot of companies manufacture the drug then sell it to larger drug companies in return for cash.
- It is imperative that investors only invest in those companies that are funded well for all their clinical needs. Investors can choose to see how the other investors invest in the business, then raise money accordingly. However, investors should also not wait for too long because they will lose the golden opportunity of getting a huge revenue.
Therefore, before investing in any biotech sector, investors need to keep in mind the risk factor that is involved in investing in this unpredictable sector.