What are the real risks in “bio-technology” companies?

manpreet Best Answer 2 years ago

Biotechnology companies are often in the top 10 of the most lucrative businesses in a market.

For example on Friday 13th march, the company I am interested in was among the best performers of the day on the Nasdaq with 16% gain.

On Tuesday two of them were in the top 10 (Nasdaq), including another one I am interested in. And each day at least one of them pop up in best performers on any market.

For quite some time, I observed this company that develops a vaccine against AIDS.

The latter proved to be 100% effective with monkeys and also passed a test in human Phase I

In September 2014 the company received the financial support of the Melinda / Bill Gates Foundation to continue testing in Texas.

It is currently listed on the Nasdaq OTCBB ticker at $ 0.02

I am tempted to invest but I would better understand the risks because at this price, for $ 1,000 you buy 50,000 shares. Which is quite unexpected, especially if the vaccine is successful.

What disturb me is that: - Despite the success of the first very successful vaccines on monkeys and humans, the price is very low - There are few quotes on this stock, sometimes only 2/3 exchanges per day usually for less than 500 000 in share volume. From time to time the action explodes with 100 or 200% gains and volumes exceeding one million and it then back down to $ 0.02

So I would like to know what is the real risk of this type of action?

manpreet 2 years ago

Note: My sister works for one of the largest clinical development, testing, and commercialization companies so I know some of the key issues but not all. This answer does not constitute advice on any particular stock or other instrument. This is mostly well researched opinion.

The problem with biotech companies (and a few other areas of technology) is that a lot of money is spent, and debt incurred, on ensuring that products are effective and safe to go to market. At any stage these tests can fail and the product is essentially worthless. At this stage the developers will have learnt a lot about the drug and how it is as efficacious as it is and so the next iteration of the potential drug will be better and hopefully less likely to cause complications and harmful side effects. The process of gaining approval for this second iteration is just as expensive, if not more so, than the last. This means that they are spending a lot of money on the drug and, for small biotech companies concentrating on one or few drugs, will have little to no income generation to offset this. If the money runs out before they get the product out they are bankrupt even if the drug is perfect.

A second issue is that they are not the only firm looking for a cure. They might have a very good drug that works very well but another company may have a better one in the pipeline that will either take their monopoly position or take all of their business based on the relative cost and efficacy. The longer it takes them to get through testing, the more likely it is that this will happen and the more likely it is that the competing drug will be first to market and receive all of the free publicity that goes with that. In this case the risk is that they have a product (eventually) but no market for it and so will again run out of money.

Another consideration is what the cure is actually worth. Prevention and awareness is already reducing the number of (wealthy) western people who have HIV and so the market size is falling where the most profit can be made. In order to get any return on your investment a profit will be required. Where HIV rates are rising is in poor countries in Africa, Asia, and south America where the price at which people could afford to buy a cure is likely to be lower than even the break even price for the firm. In this case you have a monopoly and a drug that works but no one can afford to buy it for a price that you can accept and still make a profit.

Biotech is a very risky, but potentially lucrative, area because there are just so many risks at every stage. Price volatility occurs on rumour and questionable statements from the company (who are always trying to be positive so that their funding doesn't dry up) and even relatively small trades can move the market a large amount as few people want to sell an investment with so much potential.

There are also some charged political positions with regard to HIV and AIDS, so a shift in political power could also derail a biotech firm that is resea