Biotech Values

[DewDiligence]

>Which is the best biotech to short in 2007?<

ARTE and THRM, two recent IPO’s with dubious products in aesthetic medicine that I’ve posted about extensively, are on my watchlist for shorting. The best time to strike may be just before the expiration of the insider lock-ups.

>I’m thinking REGN since they are sky high in early programs, though their technology seems promising.<

I’m inclined to agree. REGN’s excellent phase-2 results in AMD may have caused investors to overestimate the chance of success in phase-3. (This is what happened with GENR, and you know the rest of that story.) I remain far from convinced that REGN’s VEGF-Trap is the real deal, although it could yet turn out to be.

Shorting REGN in 2007 would seem to be relatively safe in terms of the clinical-results calendar because most key data won’t be out until later. However, by shorting you would have to contend with the buyout vig. I.e., if some Big Pharma thought REGN’s technology platforms per se were valuable irrespective of the VEGF-Trap program, there could be a MRK-RNAI kind of deal at a substantial premium.

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In general (and this is a point that BSR_David seems to overlook when he says that making money by shorting biotechs is trivially easy), I like to short, profitable or near-profitable companies that have excessive valuations based on overly optimistic business prospects. Examples of these kinds of drug/biotech companies I’ve shorted during the past eight years include (among others): ABI, AGN, ALKS, AMGN, BMY, BRL, CEPH, DNA, FRX, GENZ, GILD, JNJ, MATK, OSIP, QGENF, SEPR, SBUX (caffeine is a drug ), and WPI. During this period, my batting average on these kinds of shorts is better than 85%.

I’ve occasionally shorted emerging-stage biotechs too (e.g. TELK) but I’ve found that the companies I would most like to short (e.g. OCCX, HEB) have generally not been available for shorting when I wanted to short them.

Dew