companies should have the following characteristics:
Successful products on the market
A strong product pipeline with late-stage
Drugs and lead candidates that target
large or underserved markets
Alliances and marketing agreements with
pharma and/or larger biotech companies
Sustainable Research & development
Enough cash to fund operating expenses
for at least three years
Experienced management team with clean
morale and ethical records
How to evaluate biotech
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’
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
Fundamentals that can be
used in evaluating a biotech company:
Platform technology and
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
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.
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.
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