Sektory a témata
Biotechnology: How to Invest in the Sector, Which Companies and Which ETFs
Key takeaways
- Biotechnology is a sector with binary risk — a clinical trial result can double or reduce a company's share price to a third overnight.
- ETFs XBI (equal-weighted) and IBB (market-cap-weighted) both offer diversification but each dampens single-company risk differently.
- Amgen, Vertex and Regeneron are established companies with commercial products and more stable cash flow — a different profile from pre-revenue speculation.
- A good entry point into biotech ETFs is after a sector correction, not at the top of a hype cycle.
- This is not investment advice — for most investors a diversified broad-market fund is a better starting point.
August 2023. Small-cap Sarepta Therapeutics announced that the FDA had approved their gene therapy for Duchenne muscular dystrophy. The stock jumped more than 50% overnight. Six months earlier another biotech company received a rejection for its lead candidate — and shares fell 70% in a single day. Welcome to biotechnology, where one regulatory letter decides the fate of portfolios.
Why biotech is different from a "normal" sector
The pharmaceutical industry and biotechnology overlap but are fundamentally different in approach and risk profile. Traditional pharma (J&J, Pfizer) has diversified product portfolios — no single molecule accounts for the majority of revenues. A small biotech company may have a single hope: one drug in one clinical trial, and the company's entire market capitalisation reflects the probability of its success.
The path to market looks like this: pre-clinical research, Phase 1 (safety on a small sample of healthy volunteers), Phase 2 (initial efficacy in sick patients), Phase 3 (large randomised study), FDA/EMA approval and finally commercialisation. Each phase takes years and has its own probability of success. The statistics are sobering: it is estimated that of the thousand molecules entering pre-clinical research, approximately one reaches the market.
That is binary risk in its purest form. The share price of a Phase 2 company probabilistically prices the future revenues if the drug succeeds. If the study proves efficacy, the market rapidly reprices upward. If it fails or safety problems arise, value collapses to near zero — all that remains is cash on the balance sheet and the pipeline of other candidates, if any exist.
Established biotech giants: Amgen, Vertex, Regeneron
- Amgen (AMGN) — one of the very first biotech giants, over 40 years in the market. Portfolio includes biologics for rheumatoid arthritis (Enbrel), osteoporosis (Prolia), cancer and cardiovascular diseases. Strong cash flow, regular dividends. Key risk: biosimilar competition on older drugs.
- Vertex Pharmaceuticals (VRTX) — unique dominance in the cystic fibrosis market. Trikafta is a therapeutic breakthrough for the majority of CF patients and Vertex has practically captured the global market. High margins, strong pipeline into rare diseases, solid financial position. Risk: large dependence on one indication.
- Regeneron (REGN) — built its portfolio around the VelociGene antibody platform. Dupixent (atopic dermatitis and other indications) is one of the most successful biotech products of the decade. Eylea dominates the treatment of age-related macular degeneration. More diversified than Vertex, active pipeline for oncology and rare diseases.
These three companies are examples of biotech with proven commercial traction. They still face regulatory and pipeline risk, but differently from pre-revenue speculations — you have something to hold on to in fundamental analysis.
XBI vs. IBB: two ETFs, two approaches to risk
IBB — iShares Biotechnology ETF, market-capitalisation weighted. Largest companies like Amgen, Gilead or Vertex account for a large share. Exposure to small pre-revenue speculators is dampened by their small weight. Lower volatility within the sector, but still significantly more volatile than a broad-market index.
XBI — SPDR S&P Biotech ETF, equal weight. Each company in the index has roughly the same share regardless of size. Small companies with a single clinical trial carry the same weight as Amgen. Higher volatility, but also higher potential if a small company hits the jackpot. Historically XBI outperforms IBB in an uptrend, falls significantly more in a downtrend.
Neither of these ETFs is UCITS — for Czech investors look for equivalents on justETF or from your broker. UCITS biotech ETF availability varies. Before buying, check the spread, which can be significantly higher for less liquid UCITS alternatives.
When is a good time to enter biotech?
Biotech goes through pronounced hype cycles that are more visible in hindsight than in real time. In 2020–2021, XBI traded at prices reflecting extreme optimism — zero interest rates, Covid pipeline, SPAC boom brought capital into the sector and valuations detached from fundamentals. In 2022, the entire sector collapsed 50%+ from its peak.
The ideal entry is after a sector correction — not because you can time the bottom precisely, but because valuations are more reasonable and the statistical probability of future returns is higher at a lower entry price. Buying biotech at the top of a hype cycle is a recipe for painful waiting.
In my view, the biotech sector belongs in a long-term portfolio under one condition: you must be able to survive a 40–50% decline without panic selling. If not, skip the sector or leave it in the broad-market index where healthcare and biotech form a natural and proportionate share.
How biotech fits into a broader view
Biotech is the intersection of science, medicine and capital markets. The genomics revolution, mRNA technology validated by Covid, gene editing CRISPR — these things are not just hype, they have real biological foundations and clinical data behind them. The question is not whether biotechnology will change medicine (it will), but when and which companies will actually profit for shareholders.
For a diversification framework: broad-market ETFs like VWCE or CSPX include healthcare and biotech companies automatically at their natural market weight. Adding a biotech ETF consciously increases concentration in the sector — that should be a deliberate intention, not an accident. If you are drawn to a deeper dive into genomics as a biotech sub-sector, read also the article on genomics.
How to evaluate a specific biotech company before buying
If you are considering an individual stock rather than an ETF, focus on four basic questions. First — what is the company's cash runway? How many months of operations does current cash cover without additional financing? Companies with a runway shorter than 18 months and without a key study date are an additional risk. Second — when is the next catalyst? A clinical trial result, FDA decision or milestone from a partnership agreement is the moment the share price will move significantly. Third — does the company have a partnership with a large pharmaceutical company or a licensing agreement? This reduces financing risk. Fourth — how large is the addressable market for the drug? Rare diseases have fewer patients but paradoxically an easier approval path through Orphan Drug status. If you can answer these questions, you have the foundation for a more informed decision.
FAQ
How does biotech risk differ from pharmaceutical risk?
Pharma giants like Pfizer or Roche have diversified product portfolios — the loss of one drug or a failed study won't significantly threaten the company. A small biotech may have a single molecule in a single study — failure means near-zero value. For established companies like Amgen or Vertex, the profile is closer to pharma; for pre-revenue speculators it is pure binary risk with corresponding volatility.
Why does XBI fall more than IBB in a bear market?
Because XBI is equal-weighted — small high-risk companies carry the same weight as giants. In a bear market these small pre-revenue companies are most vulnerable: they stop receiving financing and valuations collapse fastest. IBB market-cap weights large stable companies higher, which dampens the overall decline in a downturn.
Are gains from biotech ETFs taxable in the Czech Republic?
Yes, in the standard way. After three years of holding, gains from ETF sales are exempt from personal income tax thanks to the three-year holding test. This test applies to all ETFs regardless of sector — biotech is no exception. Details can be found in the article on ETF taxation in the Czech Republic.