10 Commandments For Biotech Investors
Biotech remains a popular long term investment with billions of dollars invested annually to find solutions for public health, economic security and environmental sustainability issues. However, political acts can hit biotech investors hard. Law reforms on the pricing schemes of new drugs, delays in granting patents can shrink profit margins and negative headlines about costs and consumer concerns can also impact investor portfolios.
Here are the Ten Commandments for biotech drug investors:
1. Be informed
Many biotech drug companies either have no profits or are becoming highly over-valued. Do your research. Non-drug biotech companies carry a lesser risk. An informed speculator knows that if the risk of loss is great, the potential gains are just as high. Do your research to determine what the true risk possibilities are. Don’t invest on fantasies or for too small a potential reward.
2. Be aware of what you can risk
Investors should be prepared to lose every penny of their investment in biotechnology. If you already have a large speculative biotech investment through your job or company portfolio, you probably don’t need to add biotech to your own.
3. Pick companies with promising drug candidates, but...
...don’t waste your time on a drug that addresses a very small patient population unless it receives orphan drug status and thus a potential monopoly. The drug must be exciting for its potential to make money. The stock price cares only about products that sell, so keep fantasies and gambles in check.
4. Pick drugs that are up for approval within a few years
A drug should be in Phase 3 human trials. Consider a drug earlier in trials and the returns will be minimal.
5. Decide if the company can survive until possible approval
Check the company’s cash balance going back several years and determine at what rate it is declining. Compare that with the estimated time for the hopeful drug, if approved and successful, could start bringing in cash. If there is not enough cash to survive until then, the company will be forced to raise it through stock or bond sales, or alliances with bigger companies which reduces your return.
6. Estimate the average annual sales if the hopeful product succeeds
Through research, estimate the potential patient market, competition and annual revenues if the drug is approved and achieves marketing success. You want drugs that a small company shares with a larger marketing partner because it is a vote of confidence in the science and can ensure success. Warning: the company may sell the entire product to the partner in exchange for smaller royalties.
7. Try to determine the potential results of success
Take 30% of the potential annual free cash flow from the drug and multiply by twenty. For a possible $250 million a year, that’s $75 million times twenty or $1.5 billion. Then find current enterprise value (EV) When compared, the difference must be triple at least.
8. Ask if the potential reward is enough for the risk
Taking No. 7’s $1.5 billion, with an EV of $50 million or less, the potential gain for the risk is good. In less clear-cut cases check if the company has other drugs close to submission for approval. If the backup drugs are promising, then perhaps a triple is enough ($500 million current EV versus $1.5 billion).
9. Decide when you would sell after you buy
When there are good/bad trial results, approval/failure, the stock price will go crazy. Decide before you gamble how much you are willing to lose or how much will make you happy as a winner. You’ll keep your head when others are losing theirs.
10. Ask yourself if you are enjoying your investment
Buy a lower risk biotech mutual fund or ignore biotech investments entirely if you’re not enjoying your investment. There are so many other ways to spend your time and make money.