Definition and activities of the different biotechs :
Let's first take a few moments to define what a biotech company is, in other words, a biotech. This term actually refers to all scientific research, applications and technologies related to living things. This includes companies that develop new medical treatments, carry out genetic or genomic research, oncology, modelling, physics and chemistry of living things.
Also included in this category are companies that combine technology with people, such as the development of lenses for diabetics, neural implants, subcutaneous chips, among others.
But apart from the medical sector alone, other sectors are now included in the category of biotechnologies. We can thus find biotech companies specialising in agriculture with GMOs, in the marine world with the study of algae and their chemical mutagenesis, in the bioenergy or biomass sector. In short, it is possible to classify biotechnologies into four main categories, namely :
- Red biotechs for medical applications
- Green biotechs for plant applications.
- Blue biotechs for marine applications.
- White biotechs for industrial applications.
The specificities of the values of the biotechnology sector :
Let's now review the particularities of this sector of activity to better understand how to invest in this area.
First of all, let's try to understand why this sector is currently growing. Since 2008, there have been a number of IPOs for biotechs on the stock exchange and thus an increase in the weight of this sector in the economy. The number of listed French biotech companies has risen from 10 to 38 in just over ten years. The media coverage associated with these events has indeed attracted the attention of investors looking for novelty.
It is also important to understand that this sector is based primarily on innovation, medical and scientific progress, industrial biotechnology and other areas. However, many innovations are currently emerging in the oncology, immunology and prosthesis segments.
Moreover, we know that the major international pharmaceutical groups such as Sanofi or Pfizer, are the basis of the financing of biotechs which can thus provide them with new products. It is also important to understand that researchers are increasingly being pushed by governments to create start-ups using various advantageous schemes such as reform of the status of researcher, seed funds, research tax credit or IPB investments. All these elements should therefore be taken into consideration in order to determine what the future of this sector may look like.
As you will have understood, this sector of activity is in itself rather difficult to understand because of its technicality and specificities, but if you are interested in science and technical progress, this field can quickly become exciting, especially as news about these companies is common and almost daily. You will be able to follow the progress of tests in their different phases or the development of new treatments that could revolutionise medicine in the years to come.
Another peculiarity of this sector that may surprise investors is that the majority of these biotech companies do not pay dividends to their shareholders in the early years. One of the reasons for this is that they need above all to finance their projects before making them profitable. An investment in the biotech sector through traditional share purchases is therefore more suitable for traders with a long-term horizon. It should be remembered that these companies also benefit from significant value creation leverage and can therefore quickly generate profits, not to mention that sometimes spectacular movements can be observed in the price of biotech assets that are performing prowess, which is becoming increasingly frequent. But you still need to know how to spot them.
Ultimately, the biotechnology market may prove to be an attractive market for investors despite the fact that it is quite complex and requires a real interest in its activities and mechanisms.
The limits of investing in biotechs :
Investing in biotechnology can of course be an exciting activity and allow for interesting strategies but remains a risky investment like any other stock market investment.
Indeed, it should be remembered that in terms of investment, value creation is proportional to the risk in the biotech sector. We will therefore take into account the significant risk generated by the fact that the vast majority of these companies lose money and that this is an integral part of their business model.
The financial risk for investors is therefore great because if a promising product fails to be developed, the losses will be major and the company will not create a profit. However, biotechs are largely dependent on the capital markets through fundraising. However, when markets are in decline, as is the case during stock market crises, the financing of these biotech companies tends to decrease sharply, which impacts their activities and therefore their potential for future returns.
Therefore, to avoid or limit these risks, it is necessary to take a few precautions such as diversifying its investments as much as possible and devoting only part of its capital to this sector of activity. A good knowledge and a good risk management is also essential before speculating on biotechs in view of the sometimes very high volatility of some stocks. Finally, it is also necessary to have a good knowledge of the financial markets in general and to master the technical analysis and very specific fundamental analysis of these new types of companies.