Innovations in biotechnology are evolving at the speed of light.
In fact, astonishing advancements in biotech have transformed the way we practice medicine. Leading-edge biotech products and breakthroughs are literally saving thousands of lives every day.
Needless to say, biotech stocks can be strong medicine for investors, too.
For instance, the Nasdaq Biotechnology Index rose 457% from the end of August 1998 to the end of February 2000. Going back even further to the early 1990s, biotech stocks have soared by 1,347%.
Think about it... for biotech investors every $10,000 invested turned into nearly $140,000.
The good news for investors is that after slumping during the recession, biotech stocks are making a comeback. In the first quarter of 2012 alone, the Nasdaq Biotech Index gained 18.2%
And conditions are setting up for even better gains in the future.
Here's why...
While many biotech companies are riding high on new drugs, the recent surge in biotech stocks largely reflects a slew of mergers and acquisitions (M&A).
More importantly, more deals are likely on the horizon.
In fact, 91% of industry executives believe pharma-biotech mergers will increase in the next 10 years, according to imap.com.
You see, big pharmaceutical companies are losing their patents on lucrative blockbuster drugs and are about to lose billions of dollars in sales.
For instance, Pfizer Inc.'s (NYSE: PFE) cholesterol-lowering drug Lipitor earned the company a smooth $5 billion or so last year. And Bristol-Myers Squibb Co. (NYSE: BME) and Sanofi-Aventis SA (ADR NYSE: SNY) pocketed more than $6 billion in U.S. sales from the blood thinner Plavix.
However, both those patents have expired, opening the door for generic versions that could cost up to 80% less.
Fortunately for Big Pharma they're flush with cash, and the biotech sector is full of smaller biotech development companies with promising pipelines.
So instead of spending billions on years of research and testing to develop their own drugs, it only makes sense for big companies to swallow biotech companies with new products in advanced stages.
"The upside here is that large pharmaceuticals will continue to acquire these companies...They have tons of cash...which makes almost every publicly-traded biotech a target for someone," Josh Brown, a New York City-based investment advisor recently wrote.
The trend accelerated earlier this month when GlaxoSmithKline plc (NYSE: GSK) launched a hostile takeover for Human Genome Sciences (Nasdaq: HGSI), after HGSI rebuffed a $2.6 billion offer.
But large war chests also mean there's lots of competition to buy the best small companies with the most promising pipelines.
The current supply/demand squeeze sets up a perfect scenario for investors because it's likely to drive the price of acquisitions sky-high, according to Money Morning Executive Editor Bill Patalon, who spent years covering the biotech industry.
However, investing in biotech stocks requires not only an understanding of the company's finances, but also knowledge of the company's potential based on its products and technologies.
You can reduce some of the guesswork by using exchange-traded funds (ETFs), which give you exposure without betting the farm on a single company.
ETFs trade on major exchanges and expenses are generally lower than those of actively traded mutual funds.
Here are three biotech ETFs to consider:
Best of all: We've identified three biotech firms that are likely on a lot of radar screens.
But because they're quality companies with substantial growth potential, they are stocks worth holding even if no deals materialize.
To find out how to get your copy of the new report "The Biotech Buyout Binge: Why These Three Stocks Could Double Your Money in the Next Three Months" - just click here.]
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