Biotech Values

[biomaven0]

Suggested Ideas and Strategies for Biotech Investors

Well there are no miracle strategies out there (except perhaps for investing alongside RKRW).

Here are a few of my guidelines off the top of my head - they are mostly common sense:

1. Diversify. No matter how miraculous the drug or the company, unexpected stuff can happen - think Tysabri.

2. If you find a good stock, buy and hold. Trying to jump in and out of these stocks is very hard to do successfully. If there is something good, buy and hold it for a long time. Try to ignore short term swings - if you are going to be upset because of a 5% move in a day, then you have too much invested in that stock.

3. Be patient and not emotional. Buy when there is blood in the water during overall market downturns. This is admittedly very hard to do. Biotechs tend to have betas greater than one, so they will tend to move more than the market in both directions. Logically they should have betas less than one, because their fundamentals are largely uncorrelated with those of most industries.

4. If a company has a miracle drug like ibrutinib (unmet need, significant market opportunity, little or no competition, good efficacy and safety) buy and hold it for a long, long time. Don't sell on valuation - the stock can likely go much further than you might think. If need be to maintain diversification, do take something off the table.

5. Try to understand the science. Understand the competition as well as your drug.

6. Don't chase stocks on good news unless you really know what you are doing. More often than not you will have a chance to buy at lower prices if you wait.

7. Understand that you will make mistakes. When you do make a mistake, try to look back dispassionately and see where you went wrong.

8. Try to understand what news is already in a stock. For example, some people seemed puzzled that Ariad didn't move up on European approval. But that news was fully expected - realistically all that could have happened to move the stock surrounding that event was a downward move on some sort of unexpected delay in approval.

9. Look at upcoming news flow. For some of these early-stage stocks, nothing much is going to happen for quite a while. If you like the stock you can often afford to be patient and waiting to buy it cheap.

10. Be realistic about drug development risks and understand what the safety bar is for your drug. The FDA is ultimately going to weigh risk and benefit - you need to do that before they do.

11. Be realistic about funding needs and understand when a company is likely to raise money. Don't whine about dilution - that's what you signed up for when you bought an early-stage biotech.

12. Be very cautious about me-too products that are not well-differentiated from generics. Likely payors won't pay for them.

13. Be very cautious about buying a company because you like a non-lead product but not their lead product. If their lead product fails, that might be curtains for the company - at very least you can buy it cheap.

14. Stay away from bulletin board biotech companies unless you really know what you are doing.

15. Look for companies where you can tell early whether a drug is going to fly or not and where preclinical results are more likely to be a good predictor of clinical results.

Peter