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Why buying speculative biotechs is often a waste of money

Earlier this year, we saw major price movements at a number of ASX-listed biotech/medical hopefuls. It’s also true that buying a company at one price for a quick flip at a higher price – instant money – appeals to everyone’s inner gambler.

Unfortunately, the economics of this strategy don’t stack up, and as many Foolish contributors noted at the time – buying speculative biotechs is a waste of money!

This is by no means an exhaustive list, but here’s a quick recap of some of the most visible movers this year:

Without commenting on the viability of the companies’ operations, readers can see that buying into the hype would not have been a winning investment:

  • Prima BioMed Limited now sells for $0.059
  • Prana Biotechnology Limited now sells for $0.125
  • Cynata Therapeutics Ltd now sells for $0.44
  • MMJ PhytoTech Limited – formerly PhytoTech Medical Limited – now sells for $0.34

A number of these companies recently hit their lowest point all year, despite earlier optimism.

In addition to pricing risks, which are enormous, many biotech hopefuls also have unappealing financials characterised by high cash outflows (investing in research) and limited sales. This results in perpetual spending and issuing enormous numbers of new shares, which dilutes shareholders.

Furthermore, the chances of successfully developing an economically viable product are difficult to evaluate, and far from guaranteed. Even Admedus Ltd (ASX: AHZ), which has developed a product, is having difficulty converting it into sales.

Don’t speculate on biotechs with any measurable portion of your wealth.

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Motley Fool contributor Sean O'Neill owns shares of Allied Healthcare Group Ltd.. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.