Investing in biotech stocks - My experience so far

BrockStoker

Hello all,


I first posted this in the "Share dealing discussion" thread on this forum, but Apodemus suggested I start a new thread, so here it is.


Should have taken the plunge earlier(perhaps)!

Firstly, is anyone else here investing in biotech stocks?

Background - I started DIY investing (with funds) in 2013, and found myself drawn to the more racy sectors. In particular biotech/healthcare, since I have a background in biology/science, and I found the whole sector to be fascinating as well as exciting.

Having already built up a portfolio of funds, last year I lost my mum, and inherited a significant sum, most of which I will invest in funds/bonds. So after 5 years of observing the sector, I was finally able to try my hand at investing in individual shares, and I bought my first shares at the end of October, about one and a half months ago.

I decided to invest a total of £20K (+ another 10K next year) in individual stocks, and have ended up (for better or for worse) with a portfolio of 19 or 20 individual small/mid-cap biotech stocks. My plan was to hold till I saw a significant gain, then review, and either take profits or let it keep rolling. Since the sector had been beaten down for a number of years now, many stocks with at least reasonable prospects had been beaten down unfairly.

Now there's no doubt that I would get it wrong on at least a few, but with biotech, when you get it right, the value can shoot up literally over night, and then keep going some more, so I opted to spread my money over more companies, in the hope that a few could be great.

A few of the stocks I bought are very risky, with companies that are low on cash, but at the same time, have catalysts approaching that could change all that in the blink of an eye. I under weighted most of them, apart from a couple which I really liked the look of. Most stocks have a decent market cap (1+ B USD) and plenty of cash, but have simply been overlooked by Wallstreet, as well as being beaten down.

Picking them was easier than I thought. I knew what I was looking for in terms of company - companies with novel treatments using cutting edge tech, especially in the areas of gene therapy/oncology.

These areas are where there is much currently unmet need, and consequently a large market, plus new/novel treatments patents don't expire for many years, making them potential lucrative.

Along with a good pipeline of potential therapies/treatments I'm also looking for companies that have at least one promising treatment that has already has good safety/benefit performance in early phase 1/2 human clinical trials, which at least partially de-risks them, and gives them a serious chance of rapid growth.

Nothing is certain of course, but with companies like these, you only need one or two catalysts (a good trial result, or large increase in sales for example), and each catalyst can potentially move the stock between 30 to over 100 percent, and in some cases more.

On the other hand, if something goes wrong, you can expect to loose a similar percentage!

The nice thing is that many of the shares I've bought were already beaten down, so less chance of falling vast amounts.

Apart from that, reading analyst reports, looking for inflection points in charts, and looking at revenue/earnings for clues that the company may be close to/on the way to being profitable are the only ways I evaluate a company.

The one "punt" stock I bought was Virgin Galactic, bought a day or two after the IPO and it's the only non healthcare stock I hold. Go figure, it's currently (and has been since almost day 1) the biggest looser that I hold, but I believe it will still increase in value, as it has done recently.

As for the rest, I'm seeing plenty of green and very little red after after just 6 weeks. In fact, today, for the first time, one stock had me reaching for the "take profits" button:

Axsome Therapeutics Inc, which I'd bought 30 shares of for a tad over $25 per share was now trading for $80 a share thanks to a positive result in a trial testing a drug to treat depression. It had already gone up by around 90% by the end of last week, and I had contemplated (but resisted) selling it, but today I sold 10 shares, more than covering my original investment of £593.90, and still leaving me with 20 shares valued currently at over £1200 (if Yahoo Finance is to be trusted).

My platform (Iweb) is saying that I'm up by 6.32% but it's always a day behind, and last Friday was a small down for my portfolio of about -0.8% (according to Yahoo). Yahoo says I'm +13.56% (not including my sell today), but that is overestimated because it does not seem to take in to account currency, even though I'm using GBP as base currency.




A lot of this is new to me, and I am in at the deep end, but learning fast. It has helped that money to invest came through to me just in time for me to catch what looks like the start of a big rally in the biotech sector. That has no doubt given me an advantage, but my strategy is to long term hold, so I'm sure there will be some downs as well as ups!

I don't want to give anyone the impression here that they could make money doing this - it's risky even if you know a bit about the sector, and I'm prepared to loose all or most of what I invested. Only invest in what you understand!

Early days, but with AXSM, and a couple of others into high double digit % gains, including BCRX (up over 75%) and CRSP (up more than 36%), both of which I over weighted to begin with, the strategy seems to be working OK!

Worst biotech performer for me so far has been CRIS loosing me 18%, but it was a long shot, and I under weighted it so I'm only down about £100. A few others are down too, but no more than around 10%, and in most cases no where near that. I've only just bought many stocks, so that is to be expected.

Anyway, just wanted to share my experience here, and will come back and update (if it's ok?) here at some point. This is as much a new experience for me as I'm sure biotech will be for some of you out there.

I know it has been hyped in the past, and it's certainly not for everyone, but for those with the right mentality/knowledge, I think it's a very safe place to be investing right now, providing long time frames are involved.

There will be a need for medicines/treatments for a long time to come, so any talk of "price gouging" (which is effectively what kept the sector down for the last few years) is just noise if you are in it for the long term.

There are multi-billion dollar opportunities right now in biotech, being overlooked..

That's probably starting to sound like an ad, but biotech has all the ingredients for a major rally in place right now. The last time biotech rallied, the rally which ended in 2015, the index went up over 100% in a matter of months, and individual companies in some cases increased their values by thousands of percent!

The same is occurring right now, and could well continue for some time - but obviously there are no guarantees! Be wary of stocks that have already gone up! Biotech can be lucrative, but rushing into it can get you in trouble.

Probably best to buy a fund, and be prepared to hold long term if you are not sure.

I hope someone finds these ramblings useful.

Thrugelmir

Biotech generally sits at the outer edge of risk profiles. Not adverse to investing in early stage companies. However I do like to understand the business model etc. Anything which requires an open ended R&D spend with no confirmed output isn't my personal choice of investment.

Good luck.

Clive_Woody

Picking the next Vertex is a risky business, so many Biotech never make it to market. Even if they successfully navigate the clinical trial process and deliver promising data from PhIII trials then you have approvals, launches and marketing before any kind of genuine profit can be realised for the company, and the share price will mostly reflect this.

Genuine contenders will see their product (or company) snapped up by big pharma, but these are few and far between. Interesting area to be investing in and I wish you luck.

SonOf

Biotech funds can double in a year and lose 90% of their value just as quickly. They are right off the scale (in isolation of other investments) and best held in small quantities as part of a balanced portfolio.

BrockStoker

I'll also copy/reply to Apodemus's reply to my post in the above mentioned thread here:

Apodemus wrote: »

A few things I would note about the biotech sector in particular and investing in shares in general:

While it is tempting to get your initial stake back out when a share rises, I prefer the old adage of “ride your winners, cut your losses”.

I do like that adage, and plan to run all my winners, except in exceptional circumstances.

In the case of AXSM, it had already gone up quite a bit in the few months before I bought it (perhaps 1000+ %), so the potential was there to take a large hit if sentiment suddenly turned on the stock. If I had already been in on the previous 1000+ % rally, it would have been a different story, although at some point I think you have to take profits.

I have to admit, it was not an easy decision to take, but I'm happy to have some extra cash in the account so I can buy something else. Right now I still have my eye on plenty of stocks that I think have been underestimated, so I don't feel I have to have too much riding on a single stock, but in other situations it could well be wise to stick to the adage religiously.

PS. I did not realize at the time (when I bought) quite how much it had already gone up, although I knew it was a fair bit. As I found out only a few hours ago, it's currently the top performing biotech stock of the year, and is being formally being included in the NASDAQ Biotechnology Index as of 26 Dec!

All of this has my head spinning I have to admit. Trying to keep as objective as possible, but it's easy to drift off in the opposite direction, and I find myself having to give myself the occasional psychological "slap to the face" in order to get things back on track.

Apodemus wrote: »

Six weeks is too short a period to have any inkling on whether you have winners or losers!

Dealing costs can be disproportionate on very small purchases or sales and selling 10 shares at $80 each is a pretty small trade.

That is true, and as I mentioned, I will try to let most of my shares run. Thankfully the dealing cost is low with Iweb, but the FX rate can easily eat into profits - I find myself wishing I could have a separate USD cash account.

Apodemus wrote: »

I would have thought that the biggest chunk of biotech is still with the big pharmaceutical companies who can out-invest or patent-bully the wee guys.

The thing about big pharma is they are, in most cases stuck with portfolios of aging medicines, with patents starting to expire, and better competing treatments starting to become available. So big pharma is effectively being forced to snap up the smaller more nimble biotechs. A spree of acquisitions is actually part of the reason for the current rally in the sector.


Here are some recent updates/assessments of the sector which you may find interesting:
https://seekingalpha.com/article/4312849-healthcare-and-biotechnology-dashboard-update

https://www.bloomberg.com/news/articles/2019-12-17/biotech-analysts-see-deals-drug-data-carrying-2020-performance

Apodemus wrote: »

Nothing wrong with buying the boutique companies and hoping to profit from a bid situation, though.

It's the boutiques that are offering potential 100's % gains over the coming months/years, compared to more meager gains from big pharma. If a stock gets bought out it's "only" likely to increase in value by 100% or so, so I'm hoping that if any of them are going to get bought out, I've already made significant gains.

Apodemus wrote: »

Unless you are an insider, you will never know the truth about the product pipeline. Patent periods are far too short for companies to be completely open about product development.

That's a good point. I guess insider buying could give some clues. I was looking at a site the other day which tells you about the insider trading history of US stocks. I was not sure about it, but perhaps I'll see if I can find it again.

Apodemus wrote: »

And “prior art” considerations will restrict their research publications.

Sorry, I'm not familiar with the term?

Apodemus wrote: »

Unlike IT start-ups, biotech needs significant up-front investment to equip labs and run research and development programmes until an income stream is established. This means that they normally come with major debt financing and existing big backers, who will strongly influence company development and direction. This might stifle the innovation and personal shareholder return that you would prefer.

That's certainly something I had not considered before. Thanks.

Apodemus wrote: »

Having said all this, it is an interesting sector and I’m sure your progress with investing in it will be interesting.

Thanks again. If nothing else, I'm expecting a wild ride. I initially bought a few large cap biotechs that I like, but sold them since it's the long shots where the biggest gains potentially are.

A small up today, vs a similar move down from the NASDAQ biotech index. Also nice to see yesterday's gains reflected in the price Iweb is giving me today, and not far off the value Yahoo was giving me yesterday after all.

bowlhead99

Always interesting to hear others' thoughts. However, to save a point-by-point commentary, cutting to the chase:

BrockStoker wrote: »

There are multi-billion dollar opportunities right now in biotech, being overlooked..

That's not the case. You can pretty much guarantee that with the trillions of dollars available to the debt and equity markets, all the sensible opportunities are being given the appropriate amount of 'look'.

Some opportunities offer a high probability of reliable returns. Others, a low probability of high returns. Others, a high probability of negative returns and a small probability of amazing returns. All of them are being looked at, with great research budgets and furious gusto, for fear of missing out on either the 'next big thing' or the next 'no brainer' of slow and steady reliable returns.

The people with much greater resources at their disposal than you - who are willing to fund the time-costs of investigating all opportunities with the appropriate expertise, more readily than you can afford to do yourself - will have already formed their opinion on any multi-billion dollar opportunities which present themselves, and so the price you pay in the market won't be better than 'fair' for the risks being taken.

As with any sector though, the companies at the smaller end which are only a few tens or hundreds of millions up to a few billion of market cap are likely to be less researched, because some institutions with deep pockets will only be looking at largecap as they have billions to invest - they can't deploy billions into a company which only has a billion of market cap, without taking it over. But the sort of investor that wouldn't mind having a significant control position will have priced and evaluated that opportunity before you have even heard of the company existing.

Apodemus is right that there are long term deep-pocketed backers who are bankrolling the companies through their pre-revenue stages, and they know much more about the likely outcomes than you do. But their existence in support of the company doesn't indicate it's a great company - because there are lots of those backers and their deep pockets and requirement to take a 'portfolio' approach means that even the people doing this 'bankrolling' professionally will have a somewhat scattergun approach, spreading their capital far and wide to find the diamond in the rough or next big thing.

Long story short, you may have some successes because there are ample opportunities in such a sector, but it is no easier for a layman to sort the wheat from the chaff in this sector than it is in lower-growth sectors.

If the sector is a high-growth 'emerging' sort of sector with lots of smallcap companies and new tech, it may be less thoroughly or competently researched than other sectors and so an active fund manager that knows what they are doing could add value over, say, a tracker which throws its money at the biggest established companies. But as a private investor looking at individual stocks - having a background in biology or life sciences doesn't really qualify one to evaluate the commercial opportunities and risk of success/failure any more than the people who do that evaluation for a living.

Basically, being an 'enthusiastic amateur' armchair investor can be a fun hobby, but a short term 'lots of green, little red' on your portfolio is just indicative of the recent direction of markets and not your likely long term success.

Apodemus

As Bowlhead wisely implies, there is nothing wrong with running a hobby portfolio in a niche market as long as you are not too dependant on its success and don’t get sucked further and further in. But don’t be surprised if you get a lot of “just buy Vanguard” comments on this board!

My earlier comment on “prior art” simply refers to the fact that patents can be challenged if there is any sense that the innovation was already in the public domain before the patent was filed. This means that, while companies might be open about the fields of research that they are engaged in, you might not be able to assess (from their research publications) the quality of their research or the likelihood of it giving rise to profitable products or services. This weakens the advantage that you might have from being technically qualified to analyse the scientific (rather than commercial) aspects of the business.

I would also observe that scientists can sometimes be biased in favour of technically elegant, scientific solutions to problems that are equally amenable to low-tech, low-cost approaches. So please remember to take your metaphorical lab-coat off every so often when considering which biotech stocks to invest in!

AnotherJoe

I have invested in biotech but with pretty average returns via ITs specialising in that area, on the grounds they can do the research much better than me. Unlike you I don't have any expertise in the area just a belief it "ought" to be very profitable but that hasn't panned out, Ive had much more success with individual shares in areas I do understand.

Voyager2002

I also have a long-standing professional interest in Biotechnology (dating back to my Masters thesis in 1984)... So when I started investing in 2010 this sector was one of my first thoughts.

Unfortunately, the information that would enable one to make sensible choices is not publically available, and in many cases (what will be the result of a trial?) could not possibly be known. And dealing costs will be an enormous drag on anyone investing in individual companies, unless you have at least an eight-figure sum to invest. So I have always invested through Funds and ITs (and there is an interesting ETF -- Healthcare Innovation -- that I have considered but have not bought as yet).

I would highlight that Biotechnology is not the same as Health: there are important applications to agriculture and many other sectors. And of course there are good Biotechnology companies in many countries, not just the USA.

Finally, there are plenty of 'platforms' that do allow you to keep a dollar account and so save on currency costs. For what you are doing, Fineco would enable you to minimise currency-related costs.

BrockStoker

Thrugelmir wrote: »

Biotech generally sits at the outer edge of risk profiles. Not adverse to investing in early stage companies. However I do like to understand the business model etc. Anything which requires an open ended R&D spend with no confirmed output isn't my personal choice of investment.

Good luck.

Thanks Thrugelmir.


Lack of confirmed output is one of the things I look for when I look at a stock. Or rather, I'm looking for signs that this is in the process of changing. In my experience when a company goes from not being profitable to being profitable, that is usually accompanied by a significant move in valuation of the stock.

BrockStoker

Clive_Woody wrote: »

Picking the next Vertex is a risky business, so many Biotech never make it to market. Even if they successfully navigate the clinical trial process and deliver promising data from PhIII trials then you have approvals, launches and marketing before any kind of genuine profit can be realised for the company, and the share price will mostly reflect this.

Genuine contenders will see their product (or company) snapped up by big pharma, but these are few and far between. Interesting area to be investing in and I wish you luck.

Appreciate the reply Clive.

It would certainly be nice to find the next Vertex or Celgene, but I agree with your assessment that I'm unlikely to do so. However that is not going to stop me from attempting to do so.

I do believe that my chances of doing so might be slightly increased compared with previous times. That is because this latest generation of drugs/treatments is significantly more effective, and so I think this could result in significant market share going to some of the new up coming companies.

One factor in particular which I think is significant is that previously hard to treat conditions are now seeing promising treatments emerging. So there are new niches now opening up where there is little or no competition - at least initially.

Of course, with the pace of innovation this also means that competition for these new niches will increase further down the line, so it is a bit of a double edged sword. Even so, the first company with a breakthrough will usually be able to make significant profits before others get the chance to.

I realize that in many cases this is not going to happen overnight, so it's a case of hold and hope I made the right call.