After a period of weakness, biotech stocks are on the upswing, experts say. But bear in mind: Putting your money into biotechnology companies can lead you on something of a wild ride.

The field, which uses living organisms, cells and biological processes to develop products and technologies, has been known to give shareholders some serious vertigo as stocks rise and fall.

“Investing in biotechnology stocks has always required a high-risk tolerance and the patience to wait years, even decades, for results,” Morningstar analysts said last month. “These companies drive medical innovation, developing therapies that can revolutionize health care and offer significant long-term growth potential.”

The sector peaked in September 2021, according to TheStreet Pro contributor James “Rev Shark” DePorre. 

“It had run up on the liquidity the [Federal Reserve] created in the post-Covid period and benefited from vaccine creation and the new obesity drugs,” the veteran trader said. “The sector dropped sharply after that and finally hit bottom in 2022. “

Since the group has languished, he said, the iShares Biotechnology Index ETF IBB is still 15% under its highs, compared with all the major indexes, which are at all-time highs.

TheStreet Pro’s DePorre: Biotech doesn’t offer immediate upside

At last check the index was up nearly 16% this year and up 5% from this time in 2024.

“The main issues that have kept biotechnology weak are poor IPOs by companies that had no profits, high interest rates — biotechnology needs cheap capital — drug-pricing pressures from Washington and uncertainty at the Food and Drug Administration,” DePorre said.

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More important, structural issues have pushed large institutional investors to focus primarily on technology and AI. 

“Biotechnology simply didn’t offer much immediate upside, so funds rotated into AI plays and other groups with better relative strength,” DePorre noted. “With the Fed lowering rates and the FDA being more friendly, the group is in good shape to start making up some ground.”

Fidelity Investments said in a March report that “historically, the biotech industry has tended to pass through boom-and-bust cycles.”

“After the miraculously rapid development of Covid-19 vaccines in 2020, money poured into biotech ventures,” the firm said. “However, valuations started plummeting in 2022 as interest rates rose — sharply increasing the cost of capital for these research- and cash-intensive businesses — and the industry fell out of favor.”

Fidelity said that one way to measure the trends in clinical-trial results is to look at the bounce or dip in biotech firms’ stock prices and market values that occurred on days when trial results were released.

Last year appeared to mark a turning point for the industry, Fidelity said, noting that in the first three quarters of 2024 alone, small-cap biotech stocks gained nearly $30 billion in market value on trial results.

The investment firm said that attractive valuations have coincided with improving biotech-product pipelines. 

Eirene Kontopoulos, a Fidelity biotech analyst and portfolio manager, said that historically, periods of positive clinical trial data have presaged investment returns in the industry. 

Fidelity cites importance of clinical trials

“Positive or negative clinical trial events have often set the tone for the entire biotech industry,” Kontopoulos said.

Large pharmaceutical companies often acquire small-cap biotech firms to help fill holes in their product lineups that occur when their blockbuster drugs lose patent protection.

“Acquisitions can allow big pharma companies that are not as nimble to acquire drugs at the later stages of development,” Kontopoulos said.

This symbiotic relationship also benefits the acquisition targets, since the cost of shepherding promising new biotech treatments through the later stages of clinical trials and bringing them to market is onerous and capital-intensive, Fidelity said,.

The acquirer gains a new portfolio of products in development, with the hopes that one or more will become blockbusters, while the acquisition target acquires resources and support.

As far as individual stocks, DePorre said Xeris Biopharma XERS was his top pick for the year on TheStreet Pro.

The company’s stock is up 150% this year and up 181% from the year-earlier period. 

“I believe the stock is still relatively unknown and is a very good value,” DePorre said. “Revenues grew 50% last quarter and should continue at high levels. The company is developing a weekly injectable drug for hyperthyroidism, which is a potential billion-dollar opportunity.” 

DePorre, founder of Shark Investing, said he also liked Emergent BioSolutions EBS, which he described as “a turnaround story.”

“They develop vaccines for rare diseases like monkeypox and anthrax,” he said. “A new CEO is in place, and the company is turning solidly profitable after a reorganization.”