Complex products and unfathomable acronyms used to name them often puts investors off the biotech sector. While the science under-pinning the companies is complex, by learning to make sense of their business models, equity investors need not dismiss a sector that has the potential to unearth some major winners. Of course, biotech investment should only ever contribute a small part of a well-diversified portfolio, but London's Aim market is currently abundant with exciting small- and mid-cap companies.
- Investing in Biotechnology stocks at the clinical trial stage is undoubtedly high risk and it is impossible to say with confidence that a company will be a winner until positive clinical trial results are confirmed. There are, however, positive traits to looks for in companies that – while no guarantee of success – can help identify those businesses most able to manage set-backs.
- Success of even the best run enterprises depends on commercially viable scientific breakthroughs, so investors must be prepared to accept the risk of several total failures. The trade-off, however, is potential multi-bagger returns when that one winner comes off.
- There are some risks that can be avoided, such as companies that lose focus on their original goals, burn cash too quickly or take on too much by attempting their own commercialisation.
- There are some tax advantages that can be taken advantage of, although the inheritance tax exemptions for some Aim companies can be lost when biotech shares are also listed on Nasdaq.
