“In early 2000, biotechnology share prices soared to unheard-of levels, and investing in the sector briefly looked like a no-lose proposition. Only a few months later, the industry reverted to type: Share prices plunged and wallowed for three years,” writes David Hamilton in today’s Wall Street Journal.

“Now, the market for biotech shares has sprung back to life. The Nasdaq Biotechnology Index is up more than 50% since March, outpacing the Nasdaq index itself. And more than a dozen private biotechs have filed for initial public offerings in the last three months — the largest such crop of would-be IPOs since 2000.”

“Back, too, are ‘momentum’ investors, who pile into hot stocks in hopes of riding them up instead of paying attention to fundamentals. Consider shares of Genentech Inc., which have more than doubled since May, when the company announced that a new type of cancer drug called Avastin appeared to work much better than anyone had expected. Avastin isn’t even on the market yet, but that hasn’t stopped investors from grasping at extreme analyst projections that its annual sales could reach $10 billion.”

“Is it time to jump back in? Can the average investor still hope to profit from what is widely heralded as the coming biotechnology revolution?”

“The short and disappointing answer: Don’t count on it, unless you’ve got an extremely high — almost foolhardy — tolerance for risk. While there are some outsized gains to be made in biotechnology, it’s safe to say that the odds are heavily stacked against individual investors in this sector and are likely to remain that way. “
“
For starters, biotech investing is a chancy business by nature. The average biotechnology drug can take as long as 15 years to win marketing approval, according to data from consulting firm Ernst & Young LLC. More than 99% of all drug candidates fail along the way, not infrequently taking unfortunate biotechs down with them.”

“Yet most biotechs, which can burn through hundreds of millions — even billions — of dollars as they push their experimental drugs forward, are often forced to go public well before they have anything to sell, much less any way to turn a profit.”

“Without question, betting on such stocks can pay off big. One hundred dollars invested in Amgen Inc. at its IPO price of $18 in 1983 would now be worth more than $17,000. Amgen, however, is the most successful biotech in history. Far more common are cases such as that of Genex Corp., which went public in 1982 at $9.50 a share, only to see its stock collapse to less than seven cents before it sold itself to another biotech nine years later.”