How to Find the Best Biotech Mutual Funds

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By eHow Contributing Writer

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Biotechnology is any technological application that uses living organisms and/or biological processes. Biotech companies handle recombinant DNA, tissue culture, stem cell research or genetic manipulation. Here are some guidelines for finding the best biotech mutual funds.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

Prospectuses of mutual funds
Information on drug companies
Computer with internet access

Consider the Advantages of Biotech Investments

Step 1

Recognize that biotech industries have been performing well for several years. Both public (NIH) and private (venture capital) biotech investments are increasing. The number of biotech drugs in development increased from 81 in 1988 to 369 in 2000, and will likely increase as aging baby boomers create more demand.
Step 2

Understand the profit margin on biotech drugs--it's huge once it is complete. Companies have a virtual monopoly until their patent expires. Drugs are cheap to produce, require repeated use, and are recession-proof. The profit margin generally ranges from 20 to 30 percent for a successful drug.

Familiarize Yourself with the Risks

Step 1

Note that the biggest risk for biotech companies is the question of FDA approval. Testing can take ten to fifteen years and cost approximately $500M. Most drugs are not approved, and of those that are, only three out of ten drugs prove profitable.
Step 2

Be aware that once a patent expires, the drug will lose most of its market to generics. Drug patents last for 20 years, mostly taken up with R&D and FDA testing.

Learn How to Choose Companies with the Best Chance for High Performance

Step 1

Consider that a drug must earn about $150M per year for a reasonable return on investment. Ask yourself the following questions:
-Does it treat a disease in a new way or treat a disease that previously had no treatment?
-How much time remains on the patent?
-How large is the market? Look for a huge market (weight loss), a major disease (diabetes), or a smaller noncompetitive market. Search online for the number of patients and the yearly amount spent on the drug. The greater the amount, the less market share needed to meet the $150M return.
-Are there possibilities for label expansion (i.e., does the drug have other uses)? This is very profitable, since the safety testing is already complete.
-How many drugs does the company have in the development pipeline? Since only three out of ten approved drugs are considered successful, you'll want a company with diversity.

How to Become an Investor

Step 1

Learn which mutual funds comprise those companies you want to invest in. Request prospectuses from several mutual funds and compare them.
Step 2

Purchase your mutual funds from a financial advisor or online.