The biotech industry is unlike any other. It is research intensive, and years may pass before a company develops a viable product. In the meantime, such companies rely heavily on investment cash to finance operations. Since many biotech companies don't offer a true, somewhat stable, and predictable revenue stream, investors who simply look at the typical fundamental ratios will be misled. Here are a number of factors savvy investors will consider before pulling out their checkbooks.
Many biotech companies are at the development stage.
They are researching some possible treatments, but as of yet do not have anything to sell. Given the amount of resources necessary to get a product from the lab to the market, it could be financially disastrous if a development-stage firm's product does not win regulatory approval. Investors will tend to look for more-established biotech firms that already have several products in the marketplace. The more-established firms presumably have a better understanding of how to navigate the regulatory seas and will better weather any regulatory setbacks with new product lines. The size of the target market and the amount of competition a company faces can provide investors with a general idea of future growth opportunities.