Follow up to Dew's biotech investing guidelines
The one rule I would add, which is really a corollary to Dew's comments about hype, is to strictly adhere to the concept:
Extraordinary claims require extraordinary evidence.
Biotechs, especially oncology-focused biotechs, routinely test their investigative drugs in targeted indications that are often designated "orphan drug indications". Economics often dictate this strategy, since these cash-hungry enterprises need to garner an FDA approval as quickly as possible and hope to do so on the basis of relatively small studies that can be rapidly conducted (relatively speaking) using surrogate efficacy endpoints.
That is not problematic in and of itself. But the lure to investors that these companies often promote is the propsect of huge off-label sales once the drug is approved.
The most obvious example of this that comes to mind is Genta.
Based solely on several small Phase I and Phase II studies, Genta publicly touted its lead drug, Genasense, as enhancing the effectiveness of every type of anti-cancer agent in existence in literally every form of cancer, except brain cancer. They actually presented financial projections calling for Genasense to do $9.5 billion in annual sales in just the eight lead cancer indications alone, suggesting to investors Genasense was destined to overtake Pfizer's Lipitor as the greatest selling prescription medication in the history of healthcare.
And when you stepped back to objectively reflect on what basis existed to support such an extraordinary claim, you found a company had yet to complete a single randomized trial of its drug. Not one! The entire basis was the "theory" Genta put forth that Genasense would enhance the effectiveness of every anti-cancer agent, and a bunch of small Phase I and Phase II studies involved fewer than 20 patients, where patient selection can and does have a very strong influence in attaining the desired outcome.
So it's best to adopt the same posture as the FDA: assume every investigative drug is not safe and not effective in any disease indication and only reject that assumption when you see objective evidence (i.e., NOT Company PR) to support doing so. There's always an element of risk that your conclusion with respect to the evidence will differ from FDA's conclusion, but if you stay true to the concept of "Extraordinary Claims Require Extraordinary Evidence", you can minimize - if not eliminate - the instances of significantly overpaying for an equity based unfounded hype.
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