Investing in Biotechnology is a little like buying a lottery ticket. All it takes is one breakthrough discovery, and the stock you hold (or even the entire industry, for that matter) can make a huge move. But the risks here are numerous, including the uncertainty of whether a drug will successfully pass through a long series of expensive trials and gain FDA (Food and Drug Administration) approval. In addition, since many Biotech companies have yet to reach profitability, it's difficult to place an appropriate value on these stocks.

That said, the Biotech industry looks very promising right now. It enters 2004 flush with $16.4 billion in cash, a rich pipeline of new products, a supportive legislative environment, and, most importantly, rekindled investor interest. Last year, the industry finally emerged from a multi-year slump that began when the genomic bubble burst in the spring of 2000. Biotech rebounded under the supportive leadership of FDA Commissioner Mark McClellan, who approved 25 new Biotech drugs last year, up 25% from the year before, and cleared 12 new indications for previously approved products. As the new products assumed their place in a rapidly expanding market, investors took note.

The AMEX Biotech Index of 17 representative stocks rose +45% last year (vs. just +26% for the S&P 500), with smallcap stocks gaining more ground than the established names. In this bullish environment, Biotech companies were able to raise $16.4 billion in new financing, +56% more than in 2002. Meanwhile, venture capitalists poured another $3.3 billion into private Biotech firms. Biotechnology received more venture capital funding than any other industry in the third quarter of last year, according to the Biotechnology Industry Organization. The IPO market also burgeoned, with seven new firms debuting on Wall Street.

Going forward, the industry looks poised to extend its recent advance. In a sign of continued investor interest, the AMEX Biotech Index gained a healthy +5% in the month of January alone. With pending FDA approvals for major breakthrough drugs, a rich pipeline of about 400 drugs in late-stage clinical trials, and a frenzy of acquisition activity, 2004 should prove to be another highly profitable year for Biotech investors.

Analysts expect industry revenues to rise by over +20% this year and to remain strong in future years. Sales will reach an estimated $47 billion in 2004, driven by strong growth in treatments for major conditions such as cancer, autoimmune disorders and infectious diseases. The industry is also moving into new therapeutic areas for treating such conditions as severe acute respiratory syndrome (SARS) and West Nile virus. Largecap Biotech firms -- including Amgen (AMGN), Genentech (DNA), Biogen IDEC (BIIB), Chiron (CHIR) and Genzyme (GENZ) -- are expected to lead the charge in these areas as they deliver new products to market.

Special Deal for Our Web Site Visitors Act now and we'll send you a copy of our newest in-depth research report -- StreetAuthority's Top Ten Stocks for Spring 2006 -- plus one full year of Paul Tracy's Market Advisor newsletter, all for just $49.95 per year.

Based on these projections, Biotech shares could see gains of +25% to +40% once again this year. The year should also bring a couple of big Biotech mergers as the larger-cap companies attempt to go head to head with big pharmaceuticals. Given the heightened interest in genomics and obesity, these businesses should move to the forefront of the industry. Outside of the U.S., promising new markets and funding sources could be found in Europe, China, India, East Asia, and Australia.

Although the long-term potential here is enormous, keep in mind that Biotech investing is risky business. As such, we urge you to proceed with care. One way to reduce your risk when investing in this industry is to search for companies with a large number of FDA-approved products or a strong pipeline of late-stage drugs. Since many of these companies have sizable annual revenues and earnings, they not only tend to be much more stable than their peers, but their stocks are also easier to make a value judgment on. In addition, companies with advanced drugs may be seen as hot acquisition prospects for large drug firms seeking to add to their existing pipelines. Consider the recent or proposed mergers between Teva Pharmaceuticals (TEVA) and Sicor (SCRI), Pfizer (PFE) and Esperion (ESPR), and Invitrogen (IVGN) with BioReliance (BREL). All of these deals were driven by big pharma's insatiable appetite for new products to bring to market.

Evaluating the fundamentals for a Biotech stock can be tricky. Since many of these companies don't earn profits but do generate revenue, it's often important to look at each firm's price-to-sales (P/S) ratio. (Note: Because this is such a critical industry valuation measure, we present you with P/S data for several dozen major Biotech firms in the table below.) The good news for investors is that based on estimated 2004 sales, a number of firms in the AMEX Biotech Index are now trading near the bottom of their price-to-sales range over the past five years. That means this year's projected sales growth has not yet been fully factored into many of these stocks, so the shares still have plenty of room to move higher. With valuations still at reasonable levels for many Biotech stocks, the industry is definitely worth a closer look.

Although the Biotech industry has gone from boom to bust before, things are quite different this time around. More specifically, the recent boom has been totally performance-driven. Instead of blindly throwing money at the industry, investors have flocked to companies that have delivered the greatest revenue and earnings growth, as well as those with the strongest pipeline of promising new products for important diseases.

With this in mind, the following table provides a comprehensive listing of quality largecap and midcap drug development firms that you might want to take a closer look at...

FREE StreetAuthority Newsletters

Register for FREE to Investor Update In each issue of Investor Update, you'll receive actionable investment advice from StreetAuthority's best minds. Let Investor Update bring you the top ways to profit in today's market.

Register for FREE to Dividend Opportunities Join Carla Pasternak each week on her quest for high yields -- no matter where on the globe they hide. In every issue, Carla is on the hunt for yields of 8%... 10%... even 12% or more!

Register for FREE to Trade of the Week Mike Turner brings you his single best trading idea each and every week. Mike's proprietary trading system has earned him returns as high as +3,205% on individual stocks and +54% in a week!

 

  We hate spam as much as you do. Read our privacy policy.

 

6 Free Months of Bernie Schaeffer's Option Advisor Learn the secrets of successful options trading from top trader, Bernie Schaeffer. Start your free 6-month subscription to The Option Advisor newsletter now and get free online access to Bernie's Crash Course in Top Gun Trading Techniques. 3 Penny Stocks Poised to Soar 300% By the time Wall Street notices the 3 picks revealed in this report, you could be sitting on a fortune.  Click here to get immediate access to an exclusive Free report -- "3 Underground Penny Stocks Poised to Soar."

Investor's Business Daily (IBD) Get 10 Free Issues of Investor's Business Daily (IBD) – Plus 2 Free Weeks of Investors.com 52 Wins in 52 Weeks - 365 Days Without A Loss Success Trading Group scored 52 wins in 52 weeks! Get their weekend newsletters free and register for Success Trading Group's next stock picks free for 30 days!