So I see there is some discussion on biotech investing, and wanted to throw this out there. This was adapted from a prior board that is since in the graveyard and un-google-able.
Here are my biotech rules. Understand most biotechs will lose you money, and the biotech indices significantly underperform the S&P. But its somewhat fun to watch and dip your toes into, so here is how to be more disciplined about it and try to NOT lose your shirt.
1- know the drug works well. I like companies that somewhat hit their timelines. Ideally the company has some backup plans. I would add that a “platform in a pill” tends to be one that gets eaten by pharma relatively quickly (opdivo, for example, was eaten up quickly.). Soon is relative.
2: There are multiple ways to fail. Bad marketing. bad sales teams. Bad data. Bad manufacturing. This goes back to good management. If a small fry company was funded by Orbimed or 3rd Rock, I’m paying attention. And if, I dunno, an executive responsible for expanding keytruda’s labeling migrates to a company I think could have a platform-in-a-drug? I’m paying attention. I want to see my management team having done it before on a big stage. I’m unenthused by small biotechs attracting management from other smaller companies without much success. Pay attention to who funds smaller companies over the next few years, and you’ll start to see some trends over time. Now, sure, OrbiMed has some dogs in their stable, but they win plenty of times too.
3- biotech pops are predictable. and companies can still win for investors even after P3 trials. Generally, a good oncology trial has mortality / PFS as the primary outcome, followed by some sort of ability to track if the treatment is working (ie, companion diagnostics from Guardant, trending levels of your favorite cancer marker, etc), and they DONT stop the trial early for positive results. You get this from a P2 trial, then P3 are likely successful. also, a small run up prior to conferences usually is predictive of a positive result.
4- Gorilla effect exists in med too. See keytruda. ILMN. Probably TMDX too.
5- Dont change the trial! usually a bad sign. samesies for if an executive leaves ahead of trial data
6- RB universe: top dog in innovation, growing earnings, a moat, sex appeal, and overvalued to the masses …
7- DYODW … even still, you can still lose. but potentially learn something in the process. side note here- don’t believe the hype of continually changing targets. autoimmune, then GI, then cardiology, then cancer. hard pass. company looking for an indication and without focus.
8- can still make money post P3, but it helps to have a pipeline/platform in a pill - I think Iovance and immunocore can possibly do this(?). Possibly BPMC.
9 – clinical trial rules: kinda went over this already above… DONT CHANGE THE TRIAL MID-TRIAL. surrogate markers tend to be approved less.
I really dont like companies with their hands in different pots (ie, a neuro segment, an oncology segment, and a pain management segment, for instance). Ideally, 3-5 drugs with a general theme… I used to get all balled up about finances and ability to fund trials and dilution, now not so much. If you have a killer idea with good data, financiers are not going to let it die. I also dont like companies that have big deals with multiple bigger companies, I think it limits upside.
I’m excessively negative about biotech companies, usually. But I do think that this is one area where gold can be found no matter the market conditions, and the same rules can be readily applied for decades. but there are ALOT of bad actors, and ALOT of FOMO. so I try to limit biotech to probably <5% of my holdings. On average, most of them lose you money.
In general, if you focus on:
-companies with good backing / management
-companies with good clinical trial design, with good results
… and hold for much longer than you anticipate…
… you can outperform the biotech indices - but even their indices underperform the S&P, so why risk it?
Companies I have my eye on:
immunocore, Iovance, TMDX, BPMC, CDNA, repligen, lantheus, dexcom, IRTC.