22 september 2014

Why I will be writing more about biotech and pharma companies

"Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital." Warren Buffett

I recently wrote a blog piece on Kancera (here) in an attempt to try to understand what its stock investors were actually buying for their money. It was initially prompted by personal curiosity into their research and how, if possible, it could explain the huge increase the stock price has had over the past year.

My conclusion was I liked the research but I didn't like the price, or to be more accurate I couldn't understand the price considering the risks still involved. For some reason it has been my most popular post by far, perhaps it was fortuitous timing with it's recent fall in price or perhaps biotech stocks are even more popular than I realised (more on that later).

My personal background is from the pharmaceutical industry, so I felt I had some knowledge and experience in the area to research the company and come to an understanding of their R&D. So you could say, if I were to have any 'circle of competence' it should be here.

What I found was I enjoyed reading about biotech research projects more than I had expected. Plus what came apparent to me when looking at the company and other biotech's (more on that later also!), is that the challenge for investors is to not only understand the research but also the significance of the results being reported and then putting them into some overall context of the drug discovery process. That doesn't even start the valuation part!

Considering my background I've toyed with the idea of researching biotech's/pharma and writing about them before but have shied away for two main reasons

1. I like value investing, buying what is 'cheap' (of course there are many definitions of this). The biotech industry attracts a lot of speculative, 'get rich' traders and the biotech sector is in a huge bull market at the moment. Popular sectors are not exactly the best hunting grounds for value investors.

2. Evaluating biotech's, especially start ups, is challenging as they typically have no cash flows, earnings or sometimes even sales! In these cases classical valuation metrics are made worthless.

However, in light of my recent experience and thinking about it a little deeper I inverted the situation and realised that a strong bull market with wild evaluations could be exactly the right time to dig deeper into companies. Investors need level headed information to help them navigate and understand the stocks they are buying.

I will refrain from giving buy and sell recommendations but will try to help readers understand better the company and what a potential value could be. I will initially focus on Swedish biotech's but will expand it to include the Nordics. I have started researching another interesting Swedish biotech, this time already in phase 2 clinical trials.

Being the centre of the biotech universe the US will also feature now and then, there really is no avoiding it! In fact I am currently researching a US biotech that is the leader in it's field, currently has a drug candidate in phase 3 after positive phase 2 results. Despite this the stock is oddly trading at 52-week lows. Once I have gotten a better understanding of the company and what is going on I will write another blog entry.






7 kommentarer:

  1. Hi glennchem
    Sounds interesting, no I don't have a current opinion as never heard of the company before but will look into it. I can get back to you in the coming days with a first impression!

    SvaraRadera
  2. When you feel for expanding to the Nordic I would like your take on biotec pharmacon in norway=) I've been in it since 2010 and this year it finally paid off some what, but now I need to reassess the situation.

    SvaraRadera
  3. glennchem - It seems Remoxy has been denied approval twice by the FDA (2009 and 2011) and I cannot find out why. For some reason the FDA are not convinced. Pfizer (PTIE's partner) seem to be still committed to the drug as another phase III trial is ongoing on a newer version http://www.businessweek.com/ap/2013-10-22/pfizer-will-again-seek-ok-for-remoxy-pain-drug.

    SvaraRadera
  4. Hi Haystack - I will add Pharmacon to the 'to do' list. Will be interesting to look into a Norwegian biotech!

    SvaraRadera
  5. Well at least one other person who would be interested in it it seems.

    SvaraRadera
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    SvaraRadera