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Be Brave and Bet on Biotech
Biotechs are not for the faint hearted, but more than any other investment, they can transform your portfolio.

Given the risks, is it a sector worth bothering with? We definitely think so, considering our average return in the space is 87 per cent.

ImpediMed (IPD), one of our more recent recommendations is a case in point.  The diagnostics specialist spiked 30 per cent in one day in early September and has returned 145 per cent since we tipped it only last April. Investors bought the stock following a positive ruling from the American Medical Association, which means its product for diagnosing lymphoedema will be used across all cancer patients, not simply those who have suffered from breast cancer.

The stock could go much further if it gets a positive outcome in November regarding reimbursement rates. Another of our research tips, Sirtex Medical (SRX) has more than tripled since we first covered it in mid-2012, and could also keep going.  This biotech has moved from the research phase to resembling an industrial company with consistent, albeit rapidly increasing earnings from its medical device SIR-Spheres, which is used to treat cancer. It still does research, it’s just that it is a percentage of sales.

Molecular Roulette
Both these stocks could be considered the exception, and it is often said that the biotech sector is akin to playing molecular roulette, and looking at some of the recent casualties bears testament to this sentiment. These include the stock price plunges in the region of 80 per cent by Prana, QRX, Pharmaxis and Prima Biomed.

And yes, we have had some exposure to this side of the equation too, having recommended Pharmaxis in mid-2013 when its share price was about double where it is today.

Use the Portfolio Approach to Minimise Risk
To minimise your risk is always important, and I would refer you back to our columnist and fund manager Andrew Brown, who wrote in last month’s Bell Direct newsletter about the “Contiki View of Value Investing”, which involves identifying a sector that you consider to be cheap, and then using the portfolio approach to minimise the stock specific risk.

Andrew cited that Simon Marais’s funds management vehicle Allan Gray, which runs over $1 billion in funds. It has successfully used this strategy in investing in the property trust sector, in the wake of the financial crisis, achieving a seven fold return on some of its investments.

Allan Gray also uses this technique in the biotech sector.

Biotech Special Report
In our recent Special Report for full subscribers, I interviewed Allan Gray’s health and biotech expert, Graeme Shaw. His fund approaches investing in biotechs on the basis that for every five that it purchases, four will go bust and the one that wins will need to increase five-fold to make money. He says: “You have to hold your nerve when you are facing four failures, and you need to hold onto the one that’s already gone up three fold.”

Under the Radar Report often follows experts like Shaw into stocks. But we also have some expertise of our own, which is even more important. I covered the health and biotech sector for a number of years in London.

In this sector, the financial statements are often less important than understanding the science. It can be tricky, but we’re here to help.

Just remember, the more a company’s prospects are based on a successful approval from a health regulator, the bigger the risk. The long-run success of a new drug going into the clinic is one in 20.