For not very obvious reasons, individual investors invest a disproportionate share in biotechnology stocks. This is for many reasons unwise in terms of investment philosophy and the Danish/American biotech company Genmab is the latest example that support these reasons. Let us explain why.

Biotechnology is a pure binomial event

Most biotechnology companies such as Genmab are unprofitable for around 10 years before they maybe launch a commercial product on the market and become profitable. In this light, the company is constantly dependent on external financing from individual and institutional investors.

Biotechnology companies go through different development stages from pre-clinical to four different clinical phases. Each phase collects new data on the new product’s effect on the disease. In our opinion every phase is a gamble with a binomial outcome – it either goes well or bad.

In conjunction with the chronic need for external financing, biotechnology companies have periods with exceptional hype. These hypes are often driven by clinical results. Look how Genmab advanced to DKK 400 per share in 2007 and is now at DKK 58.15 per share in 2010.

Many events have led to Genmab’s decline in market value but a lot of the volatility throughout it’s years has been related to news around their clinical results. The problem as an investor is that you never know how the results will turn out. In that respect, it is easier to predict the sales and earnings of Hennes & Mauritz. Lately, the former CEO of Genmab, Lisa Drakeman, was fired and has left big hole in the company since she was one of the founders. This led to a decline in the share price. Today another negative event hit Genmab. UK’s National Institute for Health and Clinical Excellence (NICE) will not recommend one of Genmab’s products which will put the company out of a big market. Again, this is an event you could never have anticipated properly.

The conclusion

Biotechnology is until the point of profitability a pure gamble and should be treated this way. This means that the individual investor should have a low share of the portfolio in biotechnology. Even though these companies could become the next big thing and do good in the world, they should be treated like an ultra high risk investment. Many individual investors ignore this obvious logic.

Fortunately for the users of UPSIDO.com our UPSIDO Rating gives biotechnology companies a very low score indicating high risk. The company has no earnings and negative free cash flow plus constantly needs external financing until point of profitability.

An option for individual investors that want to play the biotechnology industry is to buy options in biotechnology companies before important IV-phase clinical results (the phase before commercialization). The nature of biotechnology companies being a binomial event makes it a great option play – take advantage of the volatility and play the industry with options. It also gives you an opportunity to have a higher upside without putting up with much capital as if you bought the commen share.

For the normal long-term conservative investor avoid the biotechnology industry all together and go for certainty. Use the UPSIDO Rating to sort out the risky biotechnology companies.

If you are a newcomer or a regular user to UPSIDO.com you can now watch user guide videos that introduce you to our tools and information. All the videos are free to watch. We have produced the first five videos (watch below) and will soon upload more videos.

We have decided on a simple framework for our videos. Every view (tools, stock views etc.) will have their own user guide video introducing you to the view. Besides the user guide videos every view will also have an investment lession video where we will go deeper into how the specific tool or page is used in your investment decisions. The videos will in the beginning be in Danish only but as we get finished with all the user guide and investment lesson videos in Danish, we will produce all the same videos in English as well.

You can watch our Youtube channel “UPSIDOcom” here where we will post the videos as they get produced. They will also be uploaded on UPSIDO.com and watched from the upcoming “Help” menu.

Screening – User Guide

Comparison – User Guide

Strategies – User Guide

Notes – User Guide

Introduction – User Guide

If you have not noticed yet you will get chance to hear about it know. We have changed the start page to include an activity feed which provides you with updates on news and latest financial reports on the companies you are following in your watchlists or portfolios. Very soon the activity feed will be improved with aggregation of news to give you a better overview of all the activities. We have huge plans with the activity feed and it will be used in all aspects of UPSIDO.com, so we hope you will find it useful.

Now you can easily add a stock to your watchlists or portfolio anywhere at UPSIDO.com. Just click “Add to Portfolio” in the stock view, screnning or comparison view etc. A little box will appear where you can assign which watchlist or portfolio the stock should be added to – easy and simple.

(screenshot from our screening tool)

We have also listened to all our loyal users that have wished for more transparency and options in the strategy view. Now you can see the criteria going into the strategy. If you disagree with our selection criteria you are now able to send the strategy to the screening tool and built on it to satisfy you own needs.

Soon we will also be launching a completely new free service that will help you get the most out of UPSIDO.com…