Guide To Evaluate a Biotech Company
I am currently a research analyst intern at a relatively decent sized hedge fund. One of my responsibilities is being in charge of the biotech stocks in the portfolio as well as researching new opportunities in the biotech sector. Hopefully this helps some people who are in need of some help whether it's pitching a stock for an interview or just for personal investing. There is big money to be made in the biotech sector.
Evaluating biotech companies to invest in cannot be done in the conventional way (i.e using common metrics such as P/E, Revenue,etc.) A biotechl company, especially a small one, has little to no revenue and earnings. Does this make the company crap? No, because all these companies are focused on research and development. Instead, there are three main keys to focus on while looking at a bio-pharmaceutical company.
1) Cash
2) Catalysts
3) Pipeline Potential
The first key point is cash. How much cash does the company have on hand? When was the last time they diluted their shares? How long can they last with the current cash they have on hand? How do they receive cash (i.e. by partnership, outside institutional funding, issuing more shares)?
Cash is the lifeblood of biotech companies. Without cash, they cannot fund their testing and trials which means that the company is doomed for failure.
The next key point is catalysts. What are some predicted events that will shift the stock price in a positive way? Is it the announcement of a trial that will be concluded? Is a new management team being hired? Did the quarterly financial results beat the expected data?
Catalysts are a huge attribute to biotech companies. That is how money is made and lost when investing in biotech.
Ex. A certain company is in the midst of their Phase IV trial. The trial is suppose to conclude at the end of Quarter 2 in 2013. If you expect the results to be favorable, that would be a catalyst for the stock price.
The last major key point is pipeline potential. The pipeline is all the company's drugs that they either have on the market and/or are currently testing. A diversified, well-rounded pipeline is favorable. When one speculative company only has one drug in their pipeline, it is incredibly risky to investors because if that drug is unsuccessful, then the company is at risk of completely failing.
To put this into action, let's do a quick evaluation of Celsion Corporation (CLSN).
First, let's look at their cash situation. At the end of Q3 in 2012, they had a total of $23m in cash & equivalents. In addition to this $23m, Oxford and Horizon has promised to fund $5m to CLSN if their HEAT study trial, which will be completed at the end of January, shows positive results.
Management has directly stated that the current cash is sufficient to last until the end of 2013 and no dilution will be issued until at least after the results of the HEAT study trial is out.
So for CLSN, cash situation looks fine.
Second, let's look at some short-term catalysts. The major one will be the announcement of their HEAT study trial results at the end of January. Many investors are optimistic about the results and investors have often seen biotech share prices increase as much as 200% after a successful announcement of testing.
Last, let's look at their pipeline. ThermoDox is the drug that they are currently performing tests on. However, ThermoDox is believed by Celsion to be able to treat multiple types of diseases. ThermoDox is on the verge of treating liver cancer, and is being tested for the treatment of breast cancer, and colorectal liver mets.
Due to this quick evaluation, one can see how to generally evaluate a biotech company.
Hopefully this has helped. If you have any questions or comments feel free to ask/share.
Here is your free beer bro ;D
Here is your free beer bro ;D Greatly Appreciate your effort in putting this thread together.
*It would be great if someone can do a Guide To Research/Evaluate E&P Company. thanks
nice quick summary. I'm
nice quick summary. I'm interested in how you can evaluate the potential success of trials and what not with insiders info. I assume you would hire an industry expert such as some Biochem PHD who can break down the secret sauce and analyze it.
Great post. If you haven't
Great post. If you haven't already, check this out: http://www.amazon.com/Biotech-Trader-Handbook-2nd-....
To piggyback on what
To piggyback on what ladubs111 said, I am rather unclear how non-PhDs can research and evaluate biotech stocks without understanding the science.
ladubs111: nice quick
nice quick summary. I'm interested in how you can evaluate the potential success of trials and what not with insiders info. I assume you would hire an industry expert such as some Biochem PHD who can break down the secret sauce and analyze it.
To piggyback on what ladubs111 said, I am rather unclear how non-PhDs can research and evaluate biotech stocks without understanding the science.
Generally there will be access to professionals who understand the science of it all since most if not all finance people have no idea about biotechnology itself.
I actually use a lot of outside sources to help give me an idea of trial. Other factors such as recent partnerships, outside funding, insider buying, and other drugs in their pipeline being successful all attribute to more increased confidence in a company and their drug testing.
Since analyzing biotech companies is difficult in the sense that we don't understand the science behind their products, it is a big risk factor but also has unlimited profit potential.
The greatest risk you can take in life is not to risk it all.
why your fund would hire
why your fund would hire someone with no science background to analyze bio stocks is beyond me
BigHedgeHog: why your fund
why your fund would hire someone with no science background to analyze bio stocks is beyond me
Even with a science background the people that can analyze this shit is like 10 year industry experienced PHD from Amgen, Baxter, etc. Its way beyond a normal PHD graduate. I have a STEM background and I could not tell you why the fuck the Dreamliner keeps on catching on fire.
ladubs111: I have a STEM
I have a STEM background and I could not tell you why the fuck the Dreamliner keeps on catching on fire.
Maybe it's flammable.
"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan
For biotech do you perform
For biotech do you perform NPV analysis on these pipelines and at which stages and create a DCF valuation?
I'll chime on here, but I
I'll chime on here, but I have to be a little careful what I say.....
I saw this headline and thought "interesting, but how the hell is this WSO poster going to teach us to value science". What he says is 100% true, but the only thing that matters is the pipeline potential. While worrying about burning through cash is real, if the potential is even reasonable the company will get the cash.
What I'll tell you is that it's not realistic to value the potential of an early stage drug. All you can do is make estimates at parameters of the value of the drug and of the costs to develop (side note - I think I remember reading that it now takes on average $1B for big pharma to fully develop and market a drug). Even the companies developing the drugs probably don't have accurate values of what the drug will be.
I agree with BigHedge in that I assumed most funds would hire science or engineering backgrounds for this type of position, but ladubs is also right - no entry level employee is going to get it right.
This really just boils down to risk tolerance vs. reward. As an outsider, I avoid small biotechs because my investment might go up 500% in the next 3 years if successful Phase 2 and Phase 3 testing is complete, but I really have no idea if either will be successful. Of course management will tell you they like their chances, but that management speak isn't good enough for my $.
BTbanker: ladubs111: I
I have a STEM background and I could not tell you why the fuck the Dreamliner keeps on catching on fire.
Maybe it's flammable.
Damn why didn't i think of that.
You don't have to be an M.D.
You don't have to be an M.D. to evaluate the statistical significance of trial data. Looking at past PDUFA decisions by the FDA for similar drugs can give a lot of insight into the potential for success.
I think some analysts use a
I think some analysts use a certain type of DCF to determine the amount per share that the medicine (or similar) represents, I once owned a small biotech in Belgium (they tend to have a lot biotech potentials these days) and when a certain phase was not passed analysts revalued the stock from 12 to 9, saying that the medicine would have earned 3 a share if it had been released.
How do they do compute this? No clue, and I can hardly believe that any nonscience (be it academic or recreational) guy can derive it.
BigHedgeHog: why your fund
why your fund would hire someone with no science background to analyze bio stocks is beyond me
Yeah I'm really not getting it. Love to know which funds do this so I could be taking the other side of their trades.
Hi everyone, I'm new here to
Hi everyone, I'm new here to this site and just perusing somewhat. I saw this post and it looked interesting so I would just like to add some comments. I've been around for a while, teach finance and am a CFA charterholder, but not a biotech expert by any means - though my general knowledge is respectable enough I suppose. Sometimes I question my expertise in everything...:)
I have invested in biotech/pharma stocks and tend to stay away from them in general, but once in a while invest What I've learned is that it is not always good or bad science that determines the ultimate value, but the FDA, a government (and thus political) organization. I have seen good science, confirmed by independent industry experts, go nowhere, and we've all seen crap get approved.
I disagree that you have to be scientist to properly analyze a biotech stock. Mainly because there are many other factors that determine value than the underlying science. Like what the market thinks about the science. For public companies, determining "value" relative to a stock price is easier than determining it from scratch.
Also, from what I've seen, the real options approach has largely replaced DCF as the model of choice. Since approval/no approval is a binary outcome, it makes sense.
Cheers
the biotech sector is
Interesting read, thanks for
Thanks for posting. Being a
rdlgeo: Hi everyone, I'm new
NPV analysis is really the