Biotech Investment

Investable Biotech companies should have the following characteristics:

	Successful products on the market
	A strong product pipeline with late-stage candidates
	Drugs and lead candidates that target large or underserved markets
	Alliances and marketing agreements with pharma and/or larger biotech companies
	Sustainable Research & development spending
	Enough cash to fund operating expenses for at least three years
	Experienced management team with clean morale and ethical records

How to evaluate biotech companies?

Investing in biotech business is could be reward as well as philosophically satisfying. Biotech business is quite complex and highly risky for its intrinsic nature and complex variables of product approval. Unlike other industry, biotech product has to be 100% safe (so is the goal) or at least risk to reward for the users’ benefit.

One of the most striking aspects of biotech business is its success rate in bringing final product out – it less than 0.1% (1/10th of a percent). And even to achieve that success takes over 10-12 years. Furthermore, most of the biotech businesses do not have any measurable revenue for a long period of time. As a result, valuing biotech companies is a wobbly undertaking at its best.

Investing in biotech stock market is somewhat precarious because we can not use traditional discounted cash-flow methods. Also it is difficult to predict success of a drug candidate even at its final stage (phase-III) of clinical trial. Moreover, company’s financial health and strategic alliances complicates its valuation altogether.

However, some successful large cap and profitable biotech companies might offer significant upside gain and have had the broadest appeal to investors, but those are only in limited number. Biotech Investors in general adopt a long-term approach to investing. There are some biotech stocks that can double in value overnight if a trial is successful. On the other hand, biotech stocks can also drop by 50-70% in value with disappointing results. Biotech companies’ stocks tend to be heavily influenced by favorable or unfavorable news regarding the development or clinical trials of a product.

Fundamentals that can be used in evaluating a biotech company:

Platform technology and Strong pipeline

Scientist in-house knowledge and expertise is key to the confidence that a company can offer something novel and differentiate itself from a pharma or biotech player. This is referred to as a platform technology.

A broad pipeline of potential drugs at various stages of development provides comfort that a company’s future is not depended on the success of one product. If for any reason the product fails, then the company has something to fall back on.

Another approach is to look for companies diversified around a specific disease class or that have a niche technology that can be used as a platform for a range of different drugs. However, historically stock prices are largely geared around the fortunes of the most advanced development product.

An ideal due diligence process would include checks with medical opinion leaders, clinicians, companies with competing products, and practitioners with specialized knowledge of the therapeutic field.

The important issues to address for a potential drug candidate would include:

	Does the product address a medical need either unmet with existing therapies, or with the potential to offer superior efficacy or reduced side effects?
	Is the published pre-clinical data suitably compelling to progress the product to the next stage of development?
	Has the clinical trial been designed with achievable end-points? If the trials are pivotal for approval, do they fulfill all the regulatory requirements?

Business model and Strategic Alliances

Most appealing on a risk perspective is a model based on partnering drugs at an early stage of development. Biotech companies that fail to link up with a corporate or academia partner can have trouble surviving. To ensure survival or lower risk, biotechnology companies can attempt to engineer several collaborative agreements with various pharmaceutical companies for research or marketing. Partnerships with major pharmaceutical companies provide valuable endorsement of the product in addition to the essential financial support for ongoing development.

However, the terms of any deal must be analyzed to assess the long-term returns for the biotech company. Deals, which appear generous in up-front and milestone payments, are often to the detriment of downstream royalties. Biotech companies that adopt a go-it-alone approach are, of course, inherently higher risk. Bearing the full cost of clinical development, together with manufacturing and the investment in sales and marketing infrastructure, is more than most companies and investors would like to stomach. However, an appropriate strategy could be to retain rights for certain indications or specific geographic regions.

Leadership and Vision

Biotech sector became a victim of its hype in the genome-era, as companies failed to deliver on promises, causing investor and market confidence to slip. Inherently, the market should expect some setbacks in drug development, but many of the missed milestones of this period were put down to the inability of management to guide on timelines and events.

For early-phase companies, it is critical to have senior management with a proven record of drive to a drug through the regulatory hurdles and to the market place. The management teams should be able to set out their expectations and deliver on them. Being able to achieve stated milestones is key to market performance for companies that are at the development stage.

Financial Health

Most of the R&D driven product-oriented companies in the biotech arena are in loss-making as they fund the discovery and clinical development of their drug candidates. The release of a commercial product is often many years away and requires millions of dollars. Thus a company’s burning of cash in ongoing burn rate is a critical measure of a company’s longevity. Companies that have a minimum of two years’ cash reserves are in a comfortable position.

Biotech companies are dependent on the private and institutional capital markets to provide periodic cash injections. The only other source of financing is being partnership and out-licensing. For companies that requiring additional finance before reaching profitability may access the public market (IPO) after reaching an important milestone.

Market Potential

Biotech companies that are developing products aimed at markets for a new drug that are large and under-serviced will be obvious winners. Another key factor in a drug’s success is how frequently it is likely to be prescribed. Drugs that are used to treat chronic conditions such as the afflictions related to aging and life-style diseases, will generate a lot more cash flow than infrequently used treatments like vaccines. Biotech companies that are targeting these disease classes will have a greater demand for their medicine.