Best biotech stocks

The biotech industry is on a mission to make, patent, and sell a cure for all that ails you. It’s an arena where breakthroughs in drug discovery, genetic research, and medical technology converge.

While the biotech boom of 2021 was not matched in 2022 or 2023, with initial public offerings (IPOs) and valuations dropping off a cliff, some experts believe the biotech space is headed for a golden era. They say artificial intelligence (AI) and machine learning will help us unlock the secrets of disease processes and make new medicines faster than ever.

What are the best biotech stocks?

Finding the best biotech stocks requires navigating a complex and rapidly evolving industry, characterised by intense competition and difficult-to-pronounce drug names. To give you some starting inspiration, these are the top stocks in the S&P Biotechnology Select Industry Index.

Biotech stock	Icon	1 year performance (to Feb. ’24)	5 year performance (to Feb. ’24)	Link to invest
ImmunoGen (IMGN)		521.23%	416.05%	Invest with XTBCapital at risk
Biohaven (BHVN)		147.73%	4.36%	Invest with XTBCapital at risk
Immunovant (IMVT)		89.73%	251.06%	Invest with XTBCapital at risk
Blueprint Medicines (BPMC)		74.25%	8.81%	Invest with XTBCapital at risk
Mirati Therapeutics (MRTX)		29.73%	-33.13%	Invest with XTBCapital at risk
Ionis Pharmaceuticals (IONS)		22.84%	-15.29%	Invest with XTBCapital at risk
CRISPR Therapeutics (CRSP)		16.65%	113.06%	Invest with XTBCapital at risk
Apellis Pharmaceuticals (APLS)		13.31%	351.70%	Invest with XTBCapital at risk
TG Therapeutics (TGTX)		-10.93%	290.05%	Invest with XTBCapital at risk
Beam Therapeutics (BEAM)		-45.90%	25.70%	Invest with XTBCapital at risk

What are biotech stocks?

Biotech stocks companies that develop and bring to market medical treatments and healthcare technologies. Biotechnology creates products by manipulating living biological matter, like cells and messenger RNA, and its end products include gene therapies, monoclonal antibodies, and vaccines.

Pharmaceuticals are slightly different, with the pharma sector using non-biological chemicals as its starting point. In the financial world, however, biotech and pharma firms are treated as one and the same. The key difference for investors is between small-cap and large-cap firms.

How to invest in biotech stocks

1. Open a share dealing account. Whether you want to invest directly in biotech stocks or use an investment fund, you’ll need to open a share trading account.
2. Fund your account. The next step is to deposit money into your account to buy shares or invest in a fund, either by bank transfer or using a debit card.
3. Choose your biotech stocks. Either select a direct or indirect biotech investment and research the stock you’re considering. Once you know what you want, find the biotech stocks on your platform.
4. Review and hit buy. It’s as simple as that.

Compare share dealing accounts to find the right platform for you. Make sure to use a platform with access to international markets or a large exchange-traded fund (ETF) selection if you want to invest in top biotech stocks from around the world.

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What are large-cap and small-cap biotech stocks?

Large-cap biotech stocks, like Amgen or Regeneron Pharmaceuticals, are normally rock-solid companies with multiple products on the market. These stocks usually benefit from diversified product portfolios, making them strong and steady on their feet. Amgen, for example, has a range of FDA-approved drugs treating conditions from migraines to anaemia. It has a market cap of $150 billion (£190 billion).

On the other hand, small-cap biotech stocks represent younger companies, often focusing on niche areas or single products and with market caps below £10 billion.

A single news report is all it takes sometimes to catapult a small-cap stock to stratospheric heights or drag it down into the abyss. These stocks’ fortunes are tied to clinical trial outcomes and FDA approvals. Moderna, for example, was a small company specialising in messenger RNA products before its Covid-19 vaccine achieved FDA approval. Moderna’s stock ran up from $20 on the eve of the pandemic to a peak of $450.

Why do people want to invest in biotech stocks?

Here are some of the major benefits drawing investors to this sub-sector:

• AI-driven growth potential. Some experts believe AI will help scientists drastically reduce the time taken to discover new drugs. That could lead to a big boom in products produced and sold, potentially whipping up investor excitement in the space.
• Attractive valuations. Currently, the stock prices of many biotech companies are relatively low. By December 2023, the NASDAQ Biotechnology Index was still 20% below its September 2021 peak.
• Improving macroeconomics. Developing drugs requires a lot of upfront investment and plenty of patience. When interest rates are high – as they have been since central banks began hiking to fight off inflation in 2022 – companies that need to borrow for the long term get hammered. Fortunately for biotech firms, interest rates look like they have peaked, with inflation having cooled off in the UK, the Eurozone and the US.
• Increasing medical spending. Healthcare expenditure is projected to rise, driven in large part by ageing populations. That could in turn send more money rushing into the sector in hopes of finding more effective treatments for age-related conditions such as Alzheimer’s or Parkinson’s disease.

But not everything is hunky-dory in the biotech sector. Investors often think they’re buying shares in a life-saving elixir, only to end up with snake oil. Keep reading to find out more about what can go wrong when you buy biotech stocks.

Finder survey: Would Brits consider investing in biotechnology stocks?

57% of people we surveyed said they already invest in biotechnology stocks or would consider investing in biotechnology stocks.

The risks of investing in biotech stocks

Here are some of the main drawbacks to think about if you’re considering investing in biotech stocks:

• Uncertain outcomes. Valuing early-stage biotech companies is difficult. While you may know the size of the market the drug intends to serve, it’s hard to judge the probability of the product making it past clinical trials. Firms invest huge amounts of money developing and trialling products with no guarantee of ever seeing any return or even breaking even.
• AI overhype. Although AI and machine learning look set to revolutionise drug discovery, most companies using these technologies are still at the preclinical stage. For now, it’s mostly blue-sky thinking.
• Technological stumbling blocks. Cell and gene therapies have been creating a lot of buzz in the biotech sector. But there’s still work to be done to make them reliably available for widespread use.
• Innovation slowdown. The biotech sector’s growth relies largely on continuous innovation, but scientific breakthroughs often come in stops and starts. It’s possible we could be heading for a stagnant period in which scientists struggle to overcome roadblocks in their research.

Our expert says: What’s the best way active biotech investment?

"If you don’t want to opt for the passive ETF approach that will likely invest in both some of the best and worst biotech stocks, an active investing approach targeting this sub-sector could be useful. An excellent way to do this is by using an investment trust.

For example, there’s the International Biotechnology Trust from Schroders or the Biotech Growth Trust from Fidelity. There are also other options like the Polar Capital Global Healthcare Trust that contain some biotech stocks, but also some healthcare investments from other sub-sectors. The structure of investment trusts is really useful and means you can get an expertly managed biotech portfolio for a reasonably low fee in some cases."

George Sweeney, DipFA

Deputy editor

Alternative ways to invest in biotech stocks

If ”gene sequencing” sounds more like a new dance craze than cutting-edge science, it might be wise to leave stock-picking to the experts. Fortunately, you can still gain exposure to the sector through diversified ETFs and mutual funds that hold a diversified portfolio of biotech stocks.
For example, the iShares Nasdaq US Biotechnology UCITS ETF (BTEC) aims to replicate the performance of the NASDAQ Biotechnology Index, which comprises US-listed biotechnology companies.

On the other hand, you might feel confident enough to pick your own biotech stocks. In that case, you probably have your finger on the pulse and know your messenger RNAs from your monoclonal antibodies.

Just bear in mind that even if you are a science whizz, that won’t necessarily translate into stock-picking prowess. After all, even scientists on the cutting edge are frequently wrong in their predictions, and success in the lab doesn’t necessarily mean big profits in the marketplace.

Pros and cons

Bottom line

Biotech firms experiment with living cells and their derivatives to make cutting-edge healthcare products. Investing in biotech firms, especially in the early stages, requires a lot of conviction and nerves of steel. Some stocks, like Moderna (MRNA), have catapulted by over 2,000% – but for every Moderna there are thousands of biotech failures that fall by the wayside.

AI and machine learning are all the rage in the biotech sector right now. Some experts believe these technologies will massively speed up the drug-discovery process. If you’re excited about the space but are left confused by all the terminology, you might consider leaving the stock-picking to experts and investing in a well-diversified ETF or an actively managed investment trust.

Frequently asked questions

• Are biotech stocks a good investment?

  Investing in biotech stocks can be profitable, but also risky due to the dependency on factors like clinical trial outcomes and FDA approvals. The sector's performance is volatile and no one knows for sure whether it will outperform the overall market in any given period.

• Is the biotech sector undervalued?

  The biotech sector experienced a downturn from 2021 to 2023. As of December 2023, the NASDAQ Biotechnology Index remains 20% below its September 2021 peak. However, many companies in the space also saw net earnings contract over this same period, meaning their price-to-earnings (P/E) ratios may not have come down much at all. It’s important to consider each company individually when weighing up the value on offer.

• Are biotech stocks a good investment in 2024?

  There are plenty of tailwinds blowing the biotech sector into 2024, including softening inflation and potentially declining interest rates. On the other hand, if rain clouds form over the global economy in 2024 and a recession hits – speculative, profitless, small-cap biotech stocks will likely fare about as well as a paper umbrella in a storm.

To make sure you get accurate and helpful information, this guide has been edited by George Sweeney, DipFA as part of our fact-checking process.