Daily news headlines warning us about the threat of bioterrorism have opportunists wagering that biotechnology stocks will be the next rocket to take off. Yet pros warn that biotechs are tougher to make a call on than relatively reliable blue chips. "The problem with biotech companies is that the finance statements don't tell you very much," explains David Larcker, a professor at The Wharton School at the University of Pennsylvania in Philadelphia.
Because most biotech firms don't have earnings to speak of, investors typically look at companies' proprietary assets, collaborative efforts with other firms and the potential market for drugs in the approval pipeline. But how can you quantify those things when Wharton research says .02 percent of drugs screened by the FDA and just 23 percent of drugs entering Phase I clinical trials reach the market? "It's one of those things that sounds sexy and interesting, but unless you have a scientific background, it's risky stuff," says Larcker.
Dan Gillespie, vice president and portfolio manager for the Rydex Biotechnology Fund, advises individual investors to be selectors, not collectors, so "you won't crash and burn if the sector gets spooked."
While such advice may dull the excitement for those looking for a quick hit, Larcker seconds the rationale. "As part of an entire portfolio, it might be fine to have some biotech stocks," he says. "But in terms of whether you can ring the bell with a one-shot, that's a tough game to play."
Jennifer Pellet is a freelance writer in New York City specializing in business and finance.
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