Do your research, avoid the losers
More than any other sector, investors in biotech and genomics need to understand the companies they are buying and where their products fit in the marketplace or stand in the approval process or both.
Let me give you an example: Spectrum Pharmaceuticals (NASDAQ:SPPI) I found this outfit when it had no revenue and a unique business model – it obtained drugs from larger companies that were somewhere along the clinical trial and approval process and whose parent did not want them any more for business, not scientific reasons. If memory serves, I found the company below $3 a share six or seven years ago. It is now above $15, and Spectrum has done this by executing its business plan, not making any scientific discoveries.
The development process is opaque, unpredictable and maddening even for those most successful in developing new drugs. Most believe the same is true for the FDA approval process – and they are wrong. While it can still be quite difficult to pick winners, it is easy to find losers. Back in 2002, when Imclone blew up, I was asked by clients (I was doing institutional research at the time) to see if I could find the next Imclone.
I graduated Georgetown with a degree in philosophy and minors in beer and basketball. The closest I came to biology were the two medical students I shared a house with for my last three years at school. But a client is a client. Using the great survey work done by ChangeWave Research (now part of the 451 Group) I asked people inside the industry how to find losers. Easy, they said — look for poorly constructed clinical trials.
I did. In three months I picked and wrote about six potential losers. All blew up.
This is what investors need to do. When you manage a portfolio, capital preservation comes first. When you are picking biotech and genomic stocks, capital preservation also comes first and you do this by avoiding losers.
Traditional, speculative biotech is a small part of my portfolio – but the icing on the cake so to speak, a part of my investments that could produce great returns over time. The key is time. You have to be aware of how long these investments take to play out, you have to very sensitive to critical events such as FDA hearings, you need to know who is partnering with whom and and why as the nature of the partnership could presage a buyout or takeover.
This article was originally written by Michael Shulman