Investing in Biotech

The biotech industry has been hyped in the news a lot lately. With reports such as the sequencing of the human genome by Celera to the drug testing scandals of Imclone, it's hard not to get interested in this industry. Biotech start-ups have sprung up in handfuls over the 1990s and along with it came biotech investment funds, biotech bellwethers and its fair share of lemons. Anyone who watched the biotech market in the past few years have ridden a roller coaster of ups and downs from market bubbles to economic slumps. This is not to say that the investing in biotech is out of the question, investing in biotech companies just requires a fair share of homework and research into learning about this unique industry. Long term prospects for biotech look good as exponential advances in scientific discoveries coupled with an increasingly aging population provide a large prospect and demand for biotech products.

At this point some of you may be wondering, "what exactly is the biotech industry?" In truth the term biotech is rather loosely defined as companies that either utilizes or deals with technologies coming from the fields of biochemistry, molecular biology, genetics, biophysics, and so forth. The biotech industry can be roughly divided up into about four or five different sections. Each is unique in its market size, commercial techniques and consequently financial structure. Before you start investing in a biotech company, it's helpful to first classify which section it resides in and evaluate its potential accordingly.

The first section of biotech companies deal with agricultural products. This spans a wide array of companies from the established Monsanto which provides genetically engineered crops to Prolinia, which is in the business of cloning farm animals. Some other companies in this area deal with manufacturing growth hormones for livestock or novel fertilizer for plants. Agricultural biotechs typically have the advantage of a large market without the restrictions and regulations behind human drug companies. The second section of the biotech industry develops and manufactures new drugs for human therapeutic purposes using biotech methods. These companies are similar in model to pharmaceutical companies, and indeed many drug start-ups have been absorbed into the large pharmaceuticals. Most of the big name biotech companies such as Amgen or Genentech are in this category. The third section of biotech companies caters to the drug development process going on in the pharmaceutical and biotech industry. These companies provide either specific techniques or supplies to aid in the large process of searching and developing a new drug. Some companies such as Affymetrix provide gene chip arrays, technology to help speed up drug discovery. The fourth section of biotech companies is fairly new and is involved in cosmetic solutions using biotechnology. Wide use of botox in face lifts point to just the start of this developing trend. Finally, there is a psuedo-section of the biotech industry that is comprised of companies that simply sit on ideas. These companies hold the patents to some specific scientific technique or process and make money by licensing out the rights to use these techniques to other companies.The next article in this series will provide an introduction into the process of drug discovery and development. Understanding the cycle of research and testing pharmaceuticals is vital to accurately gauging the performance of biotech companies. As mentioned before, a large number of companies in the biotech industry deal directly with producing drugs. However, many more are tied indirectly to the welfare of the drug discovery process.