Investopedia: Should Biotech Investors Go Where Institutions Won't?

Some investors find safety in numbers, while others dream of discovering the next big thing long before the big institutions. When it comes to biotech investing, though, investors may want to consider just how wise it is to invest where the big institutions fear to tread. While nobody has a fail-safe method of identifying the best biotech stocks, it seems like investing in biotechs with minimal institutional support is a gamble that just isn't worth taking. 

Framing the Problem 

The biggest problem with biotech, and the biggest reason why there can be such outsized gains for investors in the industry, is that nobody truly knows if a drug will work (or be approvable) until very late in the process. Pick the right stock, Alexion (Nasdaq:ALXN) in the late 1990s, and the rewards can be enormous. Pick the wrong stock, say Essential Therapeutics or Shaman Pharmaceuticals, and it can result in a big (if not total) loss of capital. 

A few biotechs manage to muddle along, posting just enough promising early trial data to keep accessing the capital markets, but for the most part investing in biotechs with no approved drugs is a binary outcome. With that sort of expected outcome tree, it clearly makes sense for investors to use all resources at their disposal to winnow the list of credible investment candidates, and institutional support may be one metric to consider.

To read the full piece, please click the link to Investopedia:
http://stocks.investopedia.com/stock-analysis/2011/Should-Biotech-Investors-Go-Where-Institutions-Wont-ALXN-YMI-ZIOP-ONTY-MNKD-NEOP-MELA0707.aspx