Question

So far this year, U.S.-listed biotech companies have raised roughly $9.4 billion in initial public offerings, already beating the $6.5 billion raised in all of 2018, the biggest year on record, according to Dealogic data going back to 1995. This year’s biotech issues have jumped an average of 34% on their first day of trading, the biggest average first-day pop for the sector since the tech boom in 2000. The recent surge in biotech stocks extends beyond IPOs, as investors chase companies working on potential vaccines to combat Covid-19. They also anticipate the industry may benefit from more investment by governments in drug discovery and development.

A. Why are some market participants skeptical of investors' enthusiasm for biotech shares?

B. According to the article, what are the risks associated with investing in early-stage biotechnology companies?

Answer 1

A. Why are some market participants skeptical of investors' enthusiasm for biotech shares?

The stock market is highly sentimental to its participants emotions. People buy and sell stocks on the basis of their predictions for the future. As mentioned in the Article, the US listed biotech companies raised a whoping 9.4 billion dollars in IPOs. There is also a noticable surge in the stock prices of these biotech companies. A lot of paricipants are skeptical that these stocks are over bought. They believe that these stocks' prices have been inflated. They doubt if the actual financial results will be able to match with the market prices of the stocks.

B. According to the article, what are the risks associated with investing in early-stage biotechnology companies?

It is very true that there is potential for high returns in investing in Bio-tech companies, but one should also consider the risk aspect. It is a fact that not all the biotech companies are going to be successful in creating a vaccine that will be successfull commercially. So, it is like shooting arrows into the dark void and expecting to hit the target. One can never be certain about which biotech company is going to be successful in creating a vaccine. Any measurable success remains far from certain, especially for smaller companies that lack the significant resources to conduct big clinical trials.

Thus the risk associated with investing in early-stage biotechnology companies is similar to the risk of investing in a Start-up Company. There is a huge potential for high returns in investing in these early-stage biotechnology companies, but it is a hit or miss.