The woman who runs a $2.5 billion Fidelity fund told us about the 10-item 'mental checklist' she uses to choose the most promising stocks in a notoriously risky field

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Investing in biotechnology stocks is a notoriously risky business.

• Eirene Kontopoulos manages the investment giant Fidelity's $2.5 billion biotech fund. The fund includes stakes in pharma and biotech companies like AbbVie, Vertex and Amgen.
• She told Business Insider that with hundreds of biotech companies in play, a "mental checklist" helps her narrow down which to invest in.
• Kontopoulos came to the job from a PhD in neuroscience at Harvard, and says that background also guides her investment strategy.
• Visit Business Insider's homepage for more stories.

In the high-risk, high-reward field of biotech, hundreds of companies are racing to develop the next up-and-coming new medicine.

Eirene Kontopoulos, who runs the investment giant Fidelity's $2.5 billion biotech fund, is constantly looking at all of them.

To figure out which ones to invest in, Kontopoulos said she uses a a 10-item "mental checklist." The list includes both the biology of a company's drug and mechanism by which it works, and whether she expects the drugs to be widely prescribed.

And yes, drug prices are a factor, too.

"The price of a drug is one of many components, but a very important component," Kontopoulos said. "I don't want any of my investments to end up on the cover of The Wall Street Journal as a bad guy in the drug pricing war."

Kontopoulos doesn't share the full list, a Fidelity spokesperson said.

Some of the companies that apparently met that standard include AbbVie, Vertex, Alexion and Amgen, which are among the fund's top holdings. The fund owns 88 companies in all.

A Harvard scientific background guides Kontopoulos's investment strategy

Kontopoulos came to Fidelity 11 years ago after getting her PhD in neuroscience at Harvard. Because there were no healthcare openings at first, she started off on the firm's energy team, even though she had no background in the subject.

In 2009, she moved into covering small-cap biotech companies, and last July took on the Fidelity Advisor Biotechnology Fund.

She also helps run two other funds, the $5.7 billion Fidelity Series Small Cap Opportunities fund and the $1.1 billion Fidelity Stock Selector Small Cap fund, which aren't limited to healthcare investments.

Fidelity

Eirene Kontopoulos manages Fidelity's biotech fund.

In the notoriously risky realm of biotech, where many companies don't yet sell a product or have any revenue, an investment can triple in value or tank in a day.

Because of that, Kontopoulos stays on top of cutting-edge science, but focuses on owning companies that are "close to fully baked stories."

The fund also owns biotechs of all sizes, with a focus on companies that have good earnings potential relative to their stock market valuations.

Read more: From the gene therapy that spurred a $9 billion acquisition to a CBD medication for rare types of childhood epilepsy, here are the 12 promising drugs to watch in 2019

It's roughly organized into three "buckets," with the biggest positions for the most well-established companies, Kontopoulos told Business Insider in a phone interview earlier this year.

The biggest holdings are in the first bucket, or reasonably-valued stocks with "really solid earnings growth," like Alexion and Vertex, two of the biotech fund's top holdings.

Another part of the fund is other, also reasonably valued, mid-size companies like Neurocrine Biosciences and Ascendis Pharma, which Kontopoulos hopes will hit their strides and deliver consistent financial growth in just a year or two.

Read more: The buzzy biotech Perlara got into Y Combinator and raised $10 million from investors like Mark Cuban before things went south. Its founder shares the key lesson he learned from the failure.

In the last bucket are cheaper "high risk, high reward" companies, which could be poised to move into the middle bucket - but could also fail.

How Kontopoulos's strategy will perform is still a work in progress, since Kontopoulos took over less than a year ago.

The fund has done somewhat better than the Nasdaq Biotechnology Index over the past year, with a total return of 3.5%. The fund charges ordinary investors an expense ratio of more than 1%, which can cut into returns.

It was rated two out of five stars by Morningstar as of the end of March, a ranking that's based on past performance.

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