Lead Times in Investing: Understanding Biotech Investing

Sectors: An Overview

Not all sectors are made equally. That’s one of the first aspects of investing in the real world that’s different from the investing world. Conceptually, for instance, you can understand investing as different sets of strategies, for instance, high yield, growth, dividend etc. Realistically, a company can be a manufacturing company at any stage, high yield, growth, and given time, can even become a dividend aristocrat.

On the other hand, however, there are sectors where the very nature of the business, in tandem with the regulatory oversight from the Federal and State governments requires that the ending investment is going to have a different character that has to be taken into consideration.

A case study for this, for instance, is the Biotechnology sector. Biotechs are regulated by the Federal Government and have three phases that any development of drugs or therapeutics have to pass in order to market their product or service. Many have difficulties making profits, one of the reasons for this is the long lead times.

What is lead time?

Lead time is the amount of time that passes from the beginning to end of a process. Companies use the phrase “lead time” for all sorts of different parts of running their business, from manufacturing, to shipping, etc. Most companies strive to reduce their lead times to reduce inefficiencies and become better at designing, creating, marketing, and shipping their products and services. This is because, as we all know, time is money.

Biotech has long lead times because of the unpredictable nature of the business itself. Many biotech products take over a decade to get a new drug to the end patient. “90% of all prospective new drugs fail to reach approval,” according to the Biotechnology Innovation Organization.

What does this mean for Investing?

Many biotech stocks, for instance, will have difficulty paying dividends, mostly because the money they raise from entering the stock market helps pay for the continuing research and development of the drug, as well as paying for the company and its employees while they push through the three phases of the FDA. As a result, even after their products are available for patients, biotech companies will need to market and produce their drug on a large enough scale to meet demand.

We will talk more about biotech companies in depth in upcoming blog posts, but hopefully this little introduction will help investors understand more about the different aspects of a biotechnology.

Don’t forget to catch Xavier and Alex of Emergent Financial Services every Thursday at 10:15 am on Today y Mañana!

Until next time,

I’m Nickolas Urpí