Investing in biotech and pharmaceutical stocks is often more challenging than other forms of investments. While analyzing retail stock, such as Wal-Mart, for example, requires understanding of the firm's balance sheet and operations, most people are familiar with the basic business model of the large department store, and thus would feel more comfortable with the share purchase. The home country bias suggests that investors fail to diversify their holdings across international boarders because they are familiar and comfortable with the domestic selection of stocks.

IN PICTURES: World's Greatest Investors

Going Beyond Your Comfort Zone
Generally, typical investment strategies involve analysis of the securities that people are familiar with. Start-up firms often have difficulty attracting investors because only those who are familiar with their operations will invest the desired capital. Most people who wish to diversify their portfolios to incorporate a pharmaceutical component will purchase well-known and established firms such as Pfizer (NYSE:PFE), Merck (NYSE:MRK), Johnson & Johnson (NYSE:JNJ) or simply a pharmaceutical ETF such as Pharmaceutical HOLDRs (AMEX:PPH). While such investments are definitely suitable for almost any type of investor, there are some other intriguing large and small cap stocks that do not have the same type of mainstream recognition as the aforementioned companies.

A Home Run in Biotechnology
Human Genome Sciences (Nasdaq:HGSI) is a $5.2 billion pharmaceutical company that has returned over 1,000% in the last year. After its successful phase three testing, Human Genome Sciences is waiting FDA approval for BENLYSTA, the first approved drug in 50 years which treats Lupus. Barclay's Capital is optimistic about the drug since "the trials they did and the trial design was sufficient, and those trials were successful." With more major drugs in the pipeline, particularly ZALBIN, which would treat chronic hepatitis C, HGSI has the potential to create several blockbuster drugs.

Although Human Genome Sciences trades with a beta of 5.06, in addition to a price-to-sales and price-to-book significantly larger than the industry average, official FDA approval of its drug will justify the high multiples.

A Specialty Pharmaceutical Company
Somaxon Pharmaceuticals (Nasdaq:SOMX) also had an impressive year, and increased the value of its shares by 360% year to date. In the highlights of their latest quarterly report, Somaxon noted that the FDA approved the New Drug Application for Silenor used in treating insomnia. Since the pharmaceutical company is still in the development stages, it did not generate revenues in the first quarter of 2010. However, Somaxon has cash of and cash equivalents of 58.5 million with no debt on its balance sheet.

The Drive to Discover
Incyte Corporation (Nasdaq:INCY) creates drugs for hematologic and oncology indications, in addition to chronic inflammatory and autoimmune diseases. It currently has several drugs in the pipeline which target such major ailments as Myelofibrosis and Arthritis. According to MarketWatch, the average target price for Incyte is $17, almost $4 higher than its current trading range. With a beta of 2.38, INCY is a fairly volatile stock, and should be researched carefully. Over the past year, shares returned 310%.

The Bottom Line
In addition to the well known pharmaceutical companies, investors should consider adding some of the other players as well. Although some of these may be more risky, they have the potential to produce significant capital gains. (To learn more about the industry, check out Measuring the Medicine Makers.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  3. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  6. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  9. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!