Replies to post #9509 on Biotech Values

[DewDiligence]

>>I think the other important concept to grasp is that the proverbial train almost never leaves the station. Many investors think that they need to be in a full position leading up to phase III results. I think most of the case examples in biotech will show that a relatively modest position ahead of phase III results (with put protection if you want) is the way to go. Stocks almost always revisit their pre-phase III prices.<<

This is not unreasonable as a rule of thumb, but each stock ought to be evaluated on its own merits. Clearly, some stocks take off on good data and do not revisit old price levels.

If you approach these situations as backgammon problems, they are easier to handle. I find that most investors think too much in binary or “trinary” terms. (Trinary is binary with an added third case being “I have no idea what’s gonna happen so I will hedge everything to the max.”)

If I like the odds, I will take my chances and play without hedging. I do not expect to win every time, just as I do not expect to win every backgammon match.

[zebra4o1]

Yes, you definately need to see PIIb data and maybe some trials in related indications before you wait around for PIII data.

Two other red flags I will look for in the future after my unpleasant Pharmos experience:

1) Murky modes of action. I was always a bit nervous about the 'multiple modes of action' of dexanabinol. It was supposed to be a cannabinoid, but it wasn't active at either of the two known cannabinoid receptors. It sounded like Pharmos wasn't exactly sure how it worked - turned out that it didnt' work.

2) Small biotechs with no big Pharma partners. Pharmos had no partnerships at all. You would think in a hot field like cannabinoids they could have done some sort of collaboration. Now I want to see a small company's science validated by a partnership with a big pharma. I figure these big pharma guys ought to be able to evaluate the potential of some bio-technology much better than I can.

These are two reasons I like Arena right now. (1) They are focused on small molecule drugs targeting GPCR's - so the mode of action is crystal clear, and (2) Arena has partnerships with Merck and J&J. So probably this company is not a total scam.

Actually, with Arena, the risk is right out in the open, they are trying to resurrect Phen-Fen. I am hoping that since they are trading at close to cash, there is not too much downside risk in holding through their upcoming PIIa obesity results (due in June). Plus, Arena is not a one compound company, they have lots of other compounds coming along for other indications. So if Son-of-Phen-Fen flames out, the story is not over.