Large Cap Biotech AI/automation/quant risks
I have a lifesci degree and wondering which I should target if I'm aiming to go to the buyside (pod shop) 2 years from now.
Is large cap alpha disappearing with AI and increasing data availability? I know alt data is table stakes now vs. 2018, but also prescriptions/supply chains/gross-to-net are all automated.
Should I go into SMID? Personally, I'm more interested in the financial modeling and politics behind large caps, but I'm not sure if this is a subsector worth pursuing for an enduring career.
Would really appreciate any insight.
Based on the most helpful WSO content, here's what you need to know:
Large-cap biotech investing is indeed facing challenges with the rise of AI, automation, and the increasing availability of data. Alt data has become a standard tool, and many processes like prescriptions, supply chains, and gross-to-net calculations are now automated. This has made it harder to generate alpha in large caps, as the market becomes more efficient and information is more readily available.
However, your interest in financial modeling, M&A prediction, and the politics behind large caps could still make this a viable path. Large caps often involve complex dynamics, including regulatory considerations, global market strategies, and significant M&A activity, which can provide opportunities for differentiation if you develop a deep understanding of the space.
On the other hand, SMID (small and mid-cap) biotech might offer more opportunities for alpha generation. These companies are often under-researched, less efficient, and can present unique investment opportunities, especially for those willing to dig into the details. The lack of extensive sell-side coverage in SMID caps can also create opportunities for buy-side analysts to uncover hidden value.
For an enduring career, consider the following: 1. Large Caps: If you enjoy the strategic and political aspects, large caps can still be rewarding, but you’ll need to leverage advanced tools and develop unique insights to stay competitive. 2. SMID Caps: These might offer more room for alpha generation and could be a better fit if you’re looking for a less crowded space with more inefficiencies to exploit.
Ultimately, your decision should align with your interests and where you believe you can add the most value. If you’re aiming for a pod shop, demonstrating expertise in either large caps or SMID caps, combined with a strong understanding of the biotech sector, will be key.
Sources: Biotech finance part 2: valuation methodologies and modeling considerations, Biotech finance part 2: valuation methodologies and modeling considerations, Long term, concentrated, deep fundamental investing
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Large cap biotech? Do you mean…pharma?
Companies such as Vertex, Regeneron, etc. allocate capital to in-house R&D to develop new drugs whereas pharma primarily subsists on M&A. As a result, they have quite different risk profiles, though occasionally covered by the same analyst at a pod
They are not all that different. Every long thesis is basically just top-line growth across the market cap range.
Do you have any color on how these drug companies trade? Is it a binary outcome situation?
There are only like 4-6 real large biotech stocks bro. REGN VRTX GILD BIIB and maybe MRNA BNTX as well. It’s not a real coverage area, which is why even someone with your elementary understanding of the industry can tell that analysts cross-cover with large pharma. They also don’t trade that differently as mentioned above
INCY, UTHR, NBIX, etc. are all lc by market cap as well. If you are using lc to mean trades like pharma then obviously only the companies you mentioned fit. Are you saying there's no analysts in pods who specifically cover those 6 companies ("true" lc), the grey area large caps (~20), and some other (mid cap) commercial stage biotech? If not, do you think this might change (will lc pharma alpha become very compressed due to widespread AI use/data availability)?
Uh $20B mkt cap is not a large cap company, son. Do I mean that a “large cap” should trade like pharma? Yes I do. Otherwise wtf is the point of classifying them separately? The names you mentioned do not trade like pharma. They trade the same way as other smids do. If you are saying they behave “differently” cuz they don’t just trade strictly on R&D binaries due to having commercial products, well yes you’d be right. But that does not equate them being viewed in the same bucket as “large cap pharma.” The dynamics are totally different. ALNY is $60B but still trades with similar volatility as it did when it was a $50 shitcap. Blindly classifying stocks based on mkt cap (and doing it incorrectly, mind you) is in poor form, full stop. This goes for all sectors tbh but is especially true for a sector with significant idiosyncrasies like biotech.
Some people cover clinical stage, other commercial stage, still others only “large cap,” which is more defined by daily liquidity than it is mkt cap anyway (tends to be correlated but def not 1:1)
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