The 10 commandments for biotech investing: Part two

Continuing yesterday's article, part two of the Motley Fool's 10 commandments outlines what experts are telling investors to look for when it comes to biotech stocks. When all is said and done, author Brian Lawler points out, the best tip for investors is to do your homework. The only way to make a relatively low risk, high payoff investment in this volatile biotech market is to researcher a company's management, product, market and competition. By following these commandments, investors can take some of the guesswork out of buying into a biotech company.

7. When considering investment into a drug, pay careful attention to the severity of side effects in addition the efficacy of the product. The worldwide recall of Vioxx--and the legal battle Merck now faces as a result of the drug’s side effects--is an example of why it’s important to consider both the risk and benefit of a drug.

8. Investing in companies with drugs in the early stages of development offers greater long-term rewards but a much great risk. The Motley Fool reports that only 20 percent of Phase I drugs make it to market. Those aren’t great odds. And the average $800 million cost for bring a drug to market doesn’t help the situation.

9. Never invest too heavily in one company; this is not the time not the time to put all your eggs in one basket. If you’ve chosen to invest in a company that turns up bad data, has its NDA rejected by the FDA or is forced to recall a drug, you can kiss your money goodbye.

10. Bringing a drug to market isn’t the only thing that impacts a biotech’s success. The market for certain indications is crowded, so knowing a drug’s competitors is as importing as knowing how well a drug works. In addition, the political climate can impact a drug’s chances of approval.

Read this article from the Motley Fool for more on part two of the commandments, and check out yesterday's report for the first six commandments.