Biotech investing feels great when it’s working, but when it isn’t, it’s a tough pill to swallow. The sector was hot this month after the Food and Drug Administration (FDA) approved an Alzheimer’s drug treatment.

A return to the golden age

The biotech industry kicked off the 2010’s with a record number of drug approvals and soaring stock prices… but then crashed 30% in two months. After five stagnant years, it’s back in full bloom thanks to the pandemic and:

• New drug approvals: Biogen’s (NASDAQ:BIIB) controversial new drug to treat Alzheimer’s, Aduhelm, was approved last Monday – sending its stock up 38%.
• Meme potential: Redditors piled into Orphazyme (NASDAQ:ORPH) last week – sending the Danish biotech stock up 300%.

Why is this approval so important? Similar drugs are more likely to be approved now, and the perception of a more relaxed FDA should spark enthusiasm in the sector. The snowball effect has begun.

Hop on to the biotech rollercoaster

Aduhelm’s approval didn’t just prop up Biogen’s share price, it brought the whole industry along with it:

• Eli Lilly (NYSE:LLY), another company working on an Alzheimer’s drug, rose 10% when Aduhelm was approved.
• The Nasdaq Biotechnology Index (NASDAQ:NBI), an index that tracks the sector, climbed 6% last week.

The challenge with biotech investing: Returns are heavily tied to FDA approval. If the drugs fail the clinical trials, stock prices tend to drop massively. Here’s how quickly the industry rises and falls:

• Sage Pharmaceuticals (NASDAQ:SAGE) and Biogen’s anti-depressant had weak results in its clinical trials, causing Sage’s stock to fall 27% in 5 days.
• Vertex Pharmaceuticals (NASDAQ:VRTX) discontinued their VX-864 clinical program, sending shares down by over 10%.

Investors: Iron stomach required

The biotech industry has a dark cloud hanging over its head – politics. Due to the patenting system, drugs are priced unreasonably high… and Aduhelm and its $56k/year price tag are no different.

Threats from politicians to crack down on pricing caused the sector to sink before the 2016 election, and there’s a chance it could happen again in the future.

Don’t have the stomach to swallow big biotech swings? Try a biotech ETF, courtesy of Cathie Wood: ARK Genomic Revolution ETF (NYSE:ARKG)

• Focus: 58 companies involved with therapeutics, biology and healthcare innovation.
• Top Holdings: Teladoc Health (NASDAQ:TDOC), Exact Sciences Corp (NASDAQ:EXAS), Caredx (NASDAQ:CDNA).
• Performance: 6 month (-10%), 1-year (83%), 5-year (403%)