Can biotech stocks provide crypto-like growth for your portfolio?

As illustrated by shiba inusThe explosive start of 2021, cryptocurrencies are an area where investors can find huge growth. Another such field is biotechnology, where soaring stock prices are (usually) driven by clinical trial results and regulatory decisions rather than memes and out-of-control hype.

It goes without saying that biotech stocks and cryptocurrencies are bad places for risk-averse investors. But is it possible for risk-tolerant investors to capture crypto-like benefits without facing catastrophic meltdowns by investing in biotech? It’s not a common occurrence, but it might be more likely than you think.

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It is possible for biotechs to reach the moon

Buying early-stage biotech stocks is a lot like buying lesser-known cryptocurrencies.

Pre-product biotechnology companies have no revenue, although they have projects that could generate significant revenue in the future, provided these projects can survive the demands of the clinical trial process. Since only 13.8% of attempts to manufacture a new drug fail in clinical trials, these early-stage companies are particularly risky.

Some companies may have a large sum of money to ground the stock price in reality, but many operate as phantom stocks.

The company’s plans for the future are what determine its share price. As investors get more information about what the company’s earnings might look like, such as if, for example, a key project gets positive validation in a clinical trial, the stock rises. Earnings and other measures of financial performance are generally not a major consideration, as it is expected that the non-existent revenues of the present will eventually give way to significant growth.

Take the vaccine developers Modern (NASDAQ: ARNM) and BioNTech (NASDAQ: BNTX) for example. From November 2019 to November 2020, even before their coronavirus vaccines hit the broader market, shares of Moderna rose around 330% and BioNTech saw a gain of around 416%. For reference, the two major cryptocurrencies Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO:ETH) rose around 45% and 109% over the same period, fueled by a combination of speculative buying and more widespread adoption.

ARNM Chart

mRNA data by YCharts

So, these two biotechs are definitely in the range of cryptocurrency-like returns – but they also took advantage of a huge opportunity that they will no longer have.

Although its shares rose in the months leading up to Food and Drug Administration approval and surged once approval was granted, Moderna real the ascent didn’t begin until later in the year when revenues began to flow. According to its latest earnings report, it made $18.5 billion in total revenue in 2021.

It’s hard to see how either stock would have reached its current highs without the intense global demand for a coronavirus vaccine. While it’s possible that their other earlier-stage pipeline programs eventually generated returns, it’s unlikely that any of these programs would have an addressable market as large as virtually everyone on earth, as has been the case with their COVID jabs.

The stars don’t align very often

BioNTech and Moderna are exceptional cases. Without the combination of a global crisis and the powerful catalysts to find a solution to that crisis and then commercialize it successfully, the average biotech stock struggles to provide cryptocurrency-like returns.

Think of high-profile gene-editing companies as CRISPR therapeutics and Therapeutic Intellia. Neither has anything to do with pandemic-related drug development. Even after much publicity and encouraging results from mid-stage clinical trials, CRISPR’s stock has only risen about 80.4% in the past three years, and its recent performance has been lackluster. In contrast, Intellia shares rose more than 545% over the same period due to a similar mix of positive developments.

It’s not as much as Bitcoin, but it’s in the same ballpark. But are biotech stocks as risky as Bitcoin? Could it be that biotechnology is able to generate returns similar to those of cryptocurrencies without falling victim to the same magnitude of downward fluctuations?

Unfortunately, that doesn’t seem to be the case. So far this year, Bitcoin has lost less value than any of the biotechs I’ve talked about today. And Moderna and BioNTech have also lost more value than Ethereum, even though they are making billions and billions of dollars from the sale of their vaccines.

^ SPX Chart

^ SPX data by YCharts

If you are looking to balance the growth potential of your portfolio by introducing highly speculative investments, know that cryptocurrency is indeed a performance alternative to biotechs. But don’t go overboard with your allowance.

While in principle early-stage biotechs shouldn’t be so prone to extreme cryptocurrency-like volatility due to their (limited, but still existing) financial fundamentals, they often are. Just make sure you have plenty of pillars in your wallet so you have something valuable at the end of the day.

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Alex Carchidi owns Ethereum and Shiba Inu. The Motley Fool owns and recommends Bitcoin, CRISPR Therapeutics and Ethereum. The Motley Fool recommends Moderna Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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