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By Disha Gupta
In the throes of the COVID-19 pandemic, biotechnology stocks are rapidly attracting public attention as the world gradually understands more about the nature and implications of the coronavirus. With strong fear and uncertainty, the general populous has turned to experts in the field; there is a lot of talk about the roles of vaccines and potential cures and treatments, which has accelerated considerable growth in the biotechnology industry.
While riding this bullish macro-growth wave may seem alluring to investors as a high-profit, low-risk opportunity, it is also critical to keep in mind the lifespan of these movements. The two main elements to consider when researching sectors and industries are the gains offered as potentials and the risk involved. Regarding this, many biotechnology stocks have tipped in the bullish direction almost constantly for the past few months. However, it is important to realize that this happens only with certain biotechnology stocks that emerge under the makeshift limelight created by the pandemic, and that volatility and risk accompany bullish spikes in these stocks.
Biotechnology stocks face risks related to the business more often than average stocks since they are usually bought in light of introducing “the next big thing” which can often result in failure. This higher risk in the business translates into their stocks as well. biotechnology stocks have skyrocketed, something which isn't very common. The suspecting eye may see that and only that, not the rest of the story.
In quantitative aspects, the net profit growth of the biotechnology industry for the past 5 years is 10.7%; on the other hand, the net gain of Nasdaq has risen by 231% in the same time. What this indicates is that biotechnology stocks aren't for the light hearted; it requires an immense amount of risk tolerance. A suitable example is the Amarin Corporation (NASDAQ: AMRN). In 2018, they were booming because of positive results from a study done in the cardiovascular branch. This provided a solid momentum into 2019 as well. However, Amarin’s stocks were hammered down to approximately 70% as of Q2 2020.
Patent protection and regulation are also significant concerns in the biotechnology industry. Sometimes due to these problems, the product that investors have rallied for doesn't even make it to the market. Currently, Novavax Inc. (NASDAQ: NVAX) does not have an FDA approved product yet, due to positive results from their clinical trials on potential coronavirus vaccines, the company’s stocks are currently undergoing a robust rally; as a quantitative reference, Novavax’s share price has multiplied by approximately 30 times in the last year.
It is also important to note that the biotechnology industry is currently trading much higher than regular times because of the pandemic. The situation, to some degree, resembles that in 2014 when the Ebola virus outbreak elapsed. There were many speculation that NewLink Genetics would find a successful vaccine and their prices were up in the $25 and $45 range. However, because of testing and approvals, it took five long years to get the vaccine into the market. Today, NewLink Genetics are selling at $1.
In conclusion, the biotechnology industry can be exciting and daunting at the same time. Risks are high as well as benefits. It is important to thoroughly understand the progress of biotechnology companies and acknowledge the volatile and uncertain nature of vaccine development under the current situation. One must have sound exit strategies and a high risk tolerance to effectively trade biotechnology stocks.
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