Biotech

Biotech is short for biotechnology. It refers to technology that works with living organisms: with cells, with bacteria, or with the genetic material inside them. These organisms are specifically modified or deployed so that they produce something useful. A classic example is insulin for people with diabetes. In the past it was extracted from animals, today it is produced by engineered bacteria in large tanks. When the news talks about “biotech,” it is usually referring to companies that develop new medicines in this way.

Why investors consider biotech stocks risky

Biotech is one of the most expensive industries of all. Developing a new drug often costs more than a billion euros. It usually takes ten years or more until approval. Throughout this entire time, the company earns not a single cent from the drug. Many small biotech companies therefore live exclusively off investor money.

This makes the stocks extremely volatile. A single announcement about a successful study can double the share price. A failure can cause it to plunge by 80 percent in a single day. For companies with only one main product, everything hinges on this one bet. Experts refer to this as binary risk: there is almost only all the way up or all the way down.

At the same time, the profit in case of success is enormous. An approved drug is protected by patents for years. During this time, no one else is allowed to copy it. It is precisely this prospect that draws a lot of capital into the industry despite all the risks.

From the cell to the approved drug

It starts with an active substance that cells can produce. To achieve this, researchers insert a piece of genetic information into bacteria or cell cultures. These multiply and, in doing so, produce the desired molecule, such as an antibody. The substance is then extensively purified. Such active substances are called biologics, as opposed to chemically synthesized tablets.

This is followed by clinical trials in three phases. Phase one tests on a small number of healthy people to see whether the substance is well tolerated. Phase two looks for the right dose in patients with the disease. Phase three compares the drug against the current standard treatment in thousands of patients. Only a small fraction of all candidates survive all three phases.

In the end, an authority decides on approval — in Europe the EMA, in the US the FDA. Their decision dates are important calendar entries for investors. This is also exactly where artificial intelligence now comes into play. Programs predict which molecular shape matches a disease and sort out hopeless candidates early on. This is meant to reduce the costly failures in the late phases.

Biotech in the fridge, at the pharmacy, and in the portfolio

Biotech crosses your path more often than you’d think. Enzymes in laundry detergents dissolve grease stains at low temperatures. Vegan cheese alternatives are made with the help of fungal cultures. Beer and yogurt, too, are biotechnology in a broader sense — just a very old one.

The industry became well known in Germany through BioNTech from Mainz. The Covid vaccine made the company famous worldwide within months. Other big names include Moderna in the US or Roche in Switzerland. Those who don’t want to bet on a single company often buy a fund tracking an entire industry index.

A common mistake is equating biotech with pharma. Pharmaceutical corporations are usually large companies with many products sold and stable revenues. Biotech companies are often small, research-heavy, and still without profit. Very frequently, a pharmaceutical corporation simply acquires a successful biotech company. Such acquisitions are one of the most important reasons for sudden price jumps.