Be alert for these biotech red flags

Biotech stock volatility shouldn’t deter investors, because the potential to make money is just as significant. But investors will need a strong stomach, especially those in for the short term.

Among established biotechs, says Rafael Tamargo, vice president and director of research at Wilmington Trust Asset Management in Wilmington, Del., the biggest problem usually is distribution after the product is launched.

“At the end of the day, that’s what makes or breaks the drug. You can have a great drug and no one knows about it. You can’t distribute it, and your launch is going to be slow,” Mr. Tamargo says.

Usually the way a biotech can get around pipeline problems is to partner with large pharmaceutical firms, says Nadine Wong, editor of BioTech Navigator, a trade publication in Bedford, Ore.

Cash-rich pharmaceuticals like Bristol-Myers Squibb, Eli Lilly, American Home Products and Johnson & Johnson all have bought into product-launching biotechs.

“You look at who their collaborators are, if they have big names, pharmaceuticals or big biotechs,” Ms. Wong says.

Another price-influencing factor to watch is the number of prescriptions written for a particular drug. Varying or low prescription numbers could scare off short-term investors who may drop the stock if numbers are low, says Mr. Tamargo.

Compared with the stock of major pharmaceutical companies, he says, biotech shares take more hits when disruptions occur.

“One drug failure in the pipeline of a major pharmaceutical is bad, but you can overcome it because you have so many other things out in the marketplace. In the intermediate term, it doesn’t affect you a lot, but a disappointment in a biotech company may have an effect. It does make a difference,” Mr. Tamargo adds.