5 Not-Too-Scary Ways to Make Money on Biotech Stocks

Scared of biotech?Biotech stocks have been the darlings of Wall Street over the past few years.Investing in biotech stocks, though, seems scary to many people.Here are 5 not-too-scary ways to make money from the booming biotech industry.

Source: Capture Queen on Flickr

1. Buy a biotech ETF

• One way to reduce risk is to spread your investment money across multiple stocks.

• Exchange traded funds (ETFs) provide a good vehicle to achieve this goal.

• Several ETFs are available that focus on biotech stocks.

Source: Simon Cunningham on Flickr

A good biotech ETF to consider…• The SPDR S&P Biotech ETF

(NYSEMKT:XBI) includes over 100 biotech stocks.

• No single stock makes up more than a little over 1% of the ETF.

• Despite a recent pullback, the ETF is up around 300% over the last five years.

Source: YCharts

2. Buy a big biotech’s stock

• When some think of biotech stocks, they think of highly speculative clinical-stage companies with no profit.

• Several big biotechs, though, have solid revenue and earnings – and some even pay out dividends to shareholders

Source: Wikimedia Commons

A good big biotech to consider…

• Gilead Sciences (NASDAQ:GILD) dominates the HIV and hepatitis C drug markets.

• Gilead’s 2014 earnings were $12.1 billion on $24.9 billion in revenue.

• The biotech pays out a dividend currently yielding 1.5%.

Source: Gilead Sciences

3. Buy a pharma stock with biotech tie-in

• If buying a biotech stock outright makes you jittery, another alternative is to buy a blue chip drugmaker with significant biotech revenue.

• Finding such stocks is getting even easier as Big Pharma companies buy biotechs.

Source: Wikimedia Commons

A good pharma stock to consider…• Johnson & Johnson (NYSE:JNJ)

checks off all the boxes if you’re looking for a blue chip company with exposure to biotech.

• While J&J’s business includes consumer products, medical devices, and non-biotech drugs, its Jannsen Biotech unit kicks in billions in revenue.

4. Buy convertible notes for a biotech• A convertible note is a bond that

the holder can convert into stock after a specified period.

• Many biotechs (particularly in their earlier stages) use convertible notes as an option to generate cash.

• Holders receive interest plus a chance to profit if the stock soars.

Bond

Stock

One example of a biotech convertible…• MannKind (NASDAQ:MNKD)

gives a good example of benefits that a convertible note can provide.

• Holders of 2015 convertible notes due recently made 5.75% annually and could have done even better had MannKind’s stock traded higher than $6.80.

Source: MannKind Corporation

5. Buy/sell options on a biotech stock• Aren’t options scary?! Actually,

they can help manage risk.• Call options allow you to

effectively control large numbers of shares at a relatively low cost – and a defined amount of risk.

• Options also give investors a way to profit no matter which direction the stock goes.

Source: Pixabay

A good example of a biotech option…• Think MannKind will go up by end of

year? Nervous about buying the stock since it’s down 47% in 12 months?

• Buying 100 shares would cost nearly $400. Buying a call with the option to buy 100 shares by Jan. 2016 at $4 per share would only cost ~$75.

• Defined risk. Lower cash outlay. But you can still profit nicely if MannKind’s shares climb.

Source: Wikimedia Commons

Fear not – but understand your risk

• Biotech ETFs and stocks can go down like any others.

• Small biotechs can go out of business, leaving convertible note holders in the lurch.

• Options can expire worthless.• But if you understand the risks,

biotech investing doesn’t have to be scary at all!

Source: Pixabay

Fear not – but understand the risks

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