Investors are excited about biotechnology stocks in the time of the novel coronavirus.  The Wall Street Journal reports that small and medium biotech stocks are near record highs, with a 60% resurgence in value since March.

Indeed, the time is ripe for biotech companies to cash in on COVID-19 via pursuit of novel drug therapies and vaccines for the condition, which currently has no cure.  But risky biotech companies are taking advantage of the COVID-19 market in an effort to gain more investors for pharma products which may ultimately fail.

Sources of Risk in Biotech and Pharma

The biotech industry is notorious for its high risk, so in a COVID-19 world, more than ever, investors need to look for long-term value from prospective biotech investments.  Sources of risk in the biotechnology and pharma industry – even before the current environment – include:

  • Companies’ acquisition by other companies
    Biotech is a fast-paced and dynamic world, and companies may join forces to work on a shared goal.  GlaxoSmithKline has acquired 21 companies over the past decade alone, according to Crunchbase. In an alternative scenario, two companies may race towards a cure, with one company inevitably losing out.
  • Drugs failing in clinical trials after seeming promising in the preclinical world
    While it may take ten years just for a drug to enter the clinical trials process from the laboratory, this protracted timeframe may not spell success.  In 2019, Merck’s cancer immunotherapy Keytruda, one of the company’s strongest drugs, failed in Phase 3 clinical trials for treatment of a specific type of liver cancer.  Also in 2019, Bristol Myers Squibb’s Obdivo failed in a Phase 3 brain cancer trial.
  • Adverse effects which cause drugs to promptly be pulled off the market
    In 2004, Merck recalled another blockbuster drug, the painkiller Vioxx, after patients began suffering heart attacks and strokes.

Investors Should Seek to Minimize Risk in Biotech by Avoiding COVID-19 Hype 

A key aspect of investing in biotech has always been to minimize the inherent risk as much as possible.  This means looking at the company’s foundation and whether they are an established leader in the field.  Instead of examining how companies are faring in the COVID-19 world, consider tried-and-true leaders in pharma and biotech, which are likely to play a major effort in COVID-19 due to their leadership in the space.  

Opting for low-risk stocks which performed well before the economic downturn associated with the ongoing pandemic can help improve the success of your portfolio in the long term.  These companies include:

  • Johnson and Johnson (NYSE:JNJ), a company with $82.8 billion in sales, which recently announced work on a COVID-19 vaccine and is listed at #34 in Forbes Global 2000 2020.
  • Abbott Labs (NYSE:ABT), which recently unveiled 5-minute point-of-care testing for the novel coronavirus which can be used at pharmacies and doctor’s offices.  Upon this news, the stock price rose nearly 50% from its low price of approximately $69 during the lowest point of the economic downturn to about $90 per share.
  • Gilead Sciences (NYSE:GLD), a company listed at #186 in the Forbes Global 2000 2020, which recently experienced new popularity as its antiviral treatment, Remdesivir, obtained fast-track FDA approval as a treatment for COVID-19.
  • Pharma giant AstraZeneca (NYSE: AZN) recently announced a landmark agreement with Oxford University towards making a COVID-19 vaccine a reality for millions around the world.

Other low-risk choices include Pfizer (NYSE:PFE), GlaxoSmithKine (NYSE:GSK), and Novartis (NYSE:NVS).  These biotech and pharma companies have weathered many storms, and, regardless of their contributions to COVID-19, will likely continue to thrive due to their successes elsewhere in the industry.

The Bottom Line

U.S. biotech investors should focus on long-term investing strategies with proven, big pharma companies.  They should avoid small, undercapitalized biotech companies that are simply chasing trends.