Investing in biotech stocks - My experience so far

BrockStoker · 19 December 2019 at 12:18AM

bowlhead99 wrote: »

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

Thank you for your thoughts/insights bowlhead.

Perhaps I should have said "There are multi-billion dollar opportunities right now in biotech, that are relatively overlooked", but I guess you are right in the sense that, most of those who are overlooking them, are overlooking biotech on purpose.

I get the impression that it could also be true that some stocks do get missed. There are many biotech stocks to track out there, and all it takes is one missed readout/trial result, which might completely change the outlook for that particular company.

I think another big factor is because biotech as a sector has been out of favour for much of the year, so other sectors may have been more of a priority for the institutional inverters to keep an eye on. It's just a theory, since I pretty much agree with what you say. In general the sector seems to be pretty well picked over.

There is also the issue of investors trying to translate what scientists are trying to say, and I have come across instances of this already, where a misunderstanding has led to a lower valuation than deserved. Some results can be open to interpretation anyway, and it's not always clear to all that that might mean in terms of valuation.

But again, I'm inclined to think the largest factor in a significant number of biotechs being undervalued has simply been the overall state of the market earlier on in the year. Basically investors were positioning for a bear market, so any hint of perceived weakness, and the company was punished more than was justified.

It is easy to get carried away, but I'm not going to declare myself world's best biotech stock picker.. just yet anyway. I'm also fascinated by the short term movements of these stocks, but it is a long term hold strategy, so I will try remain focused on that as far as possible.

BrockStoker · 19 December 2019 at 1:36AM

Apodemus wrote: »

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!

I'm actually planning on buying a VLS fund when the rest of the inheritance comes through, which should be soon. Otherwise I have a portfolio for income/growth, and will set up at least one more just for extra income. I own my own home, and have a generous emergency fund, plus I will probably put money into a couple of 30 day access bond accounts if I can find some reasonable rates.

I also have a strict rule - no more than £30K, and I may even just leave it at £20K.

I'm still working out where and exactly how, but eventually, if a stock has made large gains, I will take profits, and I intend to invest those profits in much less risky funds/assets.

Apodemus wrote: »

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!

Thanks for explaining. Point taken. I probably am over-estimating my perceived advantage. I can only hope then that the rest of my strategy is reasonably sound.

I'm not looking to make millions from this portfolio (but if it happens it happens!), so because of that and the risky nature of biotech I'll take relatively small gains here and there if a stock had made a significant gain. In the case of Axome I took gains quite early, but I'll try to leave it later future, so I can avoid selling many shares.

I sold 33% that time (200+% profit), but how much would it have to go up so I could get my initial stake back and only sell around 3-5% of my stock? I'm guessing not that much - another 1-200% perhaps?

I think that might be the best strategy here.

One thing I haven't done is set up any stop-losses or other buy/sell triggers. I think most stocks are too volatile, and triggers might well result in unwanted sells, or in a worst case, in a rapidly falling stock, even a stop loss is not guaranteed.

Apodemus · 19 December 2019 at 8:20AM

BrockStoker wrote: »

I also have a strict rule - no more than £30K, and I may even just leave it at £20K.

I'm still working out where and exactly how, but eventually, if a stock has made large gains, I will take profits, and I intend to invest those profits in much less risky funds/assets.

I'm not looking to make millions from this portfolio (but if it happens it happens!), so because of that and the risky nature of biotech I'll take relatively small gains here and there if a stock had made a significant gain. In the case of Axome I took gains quite early, but I'll try to leave it later future, so I can avoid selling many shares.

It’s not clear whether your strict rule applies to the portfolio value or the amount of external cash added to the portfolio, but either way, rules are made to be broken!

Clearly how you handle all this is a matter of your personal approach to the risks, but you’ll certainly not make millions if you take all the gains out to put them into safer investments.

BrockStoker wrote: »

Thanks for explaining. Point taken. I probably am over-estimating my perceived advantage. I can only hope then that the rest of my strategy is reasonably sound.

We all over-estimate our perceived advantage! For the record, my PhD was part-funded by a big pharma, patented, but never commercialised. I was not allowed to publish any of the results and the thesis itself was locked away in the bowels of the library and only available on written request and with author’s approval. (Patents themselves are of course freely searchable and give all sorts of interesting info on applicants...;) ).

BrockStoker wrote: »

I sold 33% that time (200+% profit), but how much would it have to go up so I could get my initial stake back and only sell around 3-5% of my stock? I'm guessing not that much - another 1-200% perhaps?...

I guess it’s a head/heart thing. Like you, I would be sorely tempted to take my initial stake back out as soon as possible, leaving the gains to run. I believe that the stats suggest that this is not the most rational approach. But what do I know...I paid off my mortgage as soon as I could rather than keeping a cheap loan and investing the capital! :rotfl:

Jaynishriya · 19 December 2019 at 10:05PM

interesting read. Keep it up folks! I hope WPCT recovers with a bang in a year's time..

Clive_Woody · 19 December 2019 at 11:55PM

BrockStoker wrote: »

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've worked in pharma for the last 20 odd years and have a funny story about Vertex. I used to work for a top 5 pharma who was looking at VTX as a potential acquisition, after due diligence was completed they decided against it as it was seen as too risky (they were quite a risk averse company). Shortly afterwards VTX released data on their late stage trials in CF and it all took off from there and they've not looked back. The medical director who led the due diligence piece now works for VTX.

This illustrates the difficulty of spotting the ones to go after. Despite having a degree and PhD in pharmacology, backed up by 20 years working in clinical research, I still wouldn't like to pick an emerging biotech to back with my own money. I've seen drugs go all the way to Ph3 trials and fail, with £100millions spent in development and nothing to show for it.

BrockStoker · 20 December 2019 at 1:42AM

Sorry it's taking me so long to reply to some of you. Got lots on right now, and I'm slow to begin with when it comes to typing out replies, but I will try to address everyone eventually. All the replies have been very helpful, and thanks to all who have offered their input on the topic.

AnotherJoe wrote: »

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.

Thanks for the reply.

Are you still invested? How long have you been holding?

Over long time scales most biotech funds I keep track of have done well, but then I only track a few. No doubt there are some worse than average performing funds out there!

It does not surprise me that you have better success in areas you understand better. Personally at least, it makes sense to me to concentrate my resources into understanding a small part of the market.

BrockStoker · 20 December 2019 at 1:58AM

Voyager2002 wrote: »

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.

Thanks for the reply. Good points.

Hopefully I should be able to keep dealing costs down. I'm not going to trade often now that I have used up nearly all my cash. I'll just leave them alone for at least a few years, or sooner if an individual stock makes a large enough to warrant trading.

Thanks for the tips on platforms. It would be hard for me to switch right now though as Iweb is very good over all, but the foreign currency cash account would have been useful when I was buying stocks in the previous weeks. I have to admit (if I did not already?) that I switched out of a few safer large caps a week or two back, and that was fairly costly, but now I'll stick with what I have, so it should not be as much of an issue.

BrockStoker · 20 December 2019 at 3:20AM

Radiantsoul wrote: »

I think you will be in for quite a ride.

I think that although there are a lot of new smaller companies buzzing around various niche treatments that does not mean they will supplant big pharma. The large established companies have well established regulatory, commercial, pricing and access teams, manufacturing, distribution, finance, etc. This makes it quite hard for new companies to break into the sector, perhaps the most obvious exit for biotech investors is a sell to large pharma. I guess the future benefits of the drug will be split between the biotech shareholders who cash out and the pharma investors who are buying in.

The risks of investing in a company with one product that is potentially large, but with a high chance of failure is obviously that the product will fail. Or it will be second or third to market. Or something will go wrong with patent. Or a better product will come along. Even if these companies have success they will need more and more capital. This may mean diluting your interest or selling of the assets to big pharma at a price that depends on what the market will bear at the time rather than the long term profits available.

I think at 2-3% of your wealth it is fine, and if you enjoy it, why not? I think there is a very real change that it might fall to a much smaller part of your wealth and that is something that few people are happy to accept.

Thank you for the reply.

I do agree, biotechs will never replace big pharma. I believe you are also right that big pharma will still hold most of the cards, at the end of the day. So yes, I'll probably have think more about the dynamics between big pharma/biotech and where I invest. Thanks.

At the very least I have tried to invest most of my money into companies which have multiple products in their pipelines, although I admit there are at least a few that are very high risk long shots.

The last one was just a few hours ago in fact: XOMA

I have a feeling I'll regret that one, and that I did not buy lower than $24.71.

Other than that still doing good overall. Was up today, and the day before, most of the progress coming from AXSM up 320% (total profit)/$105 at one stage earlier in the day.

Expecting results from a phase 3 trial of an AXSM drug (AXS-07 - for treating migraines, which it appears could have a high chance of success) before December is out, so it could potentially climb significantly higher than it is now in the next few days! Or fall back down!

The other big driver has been Virgin Galactic which was up more than 10% over the last two days. Worst looser has been KALA, another very long shot which I bough a few days ago, so hardly surprising.

Over all my investment is up over 3K/15% as of today. It beat the NASDAQ biotech index today, and yesterday (I think - I did not make a note of what it was!). Wish I had made a note of how much NBI was up/down - I have started doing so only just now.

BrockStoker · 21 December 2019 at 12:44AM

benbay001 wrote: »

From your post I feel you have literally just picked a sector you like

What exactly is wrong with picking a sector I like (and understand)?

benbay001 wrote: »

and bought a load of stocks.

I'm sorry I gave you that impression.

I would say that most of them have been reasonably carefully selected. Granted, there are a few which I saw and bought after only minimal research, but they probably make up less than 15% of the portfolio.

benbay001 wrote: »

Have you got a single stock that has ever turned a profit?

Yes, I have 2 out of 19 currently:

INVA
https://finance.yahoo.com/quote/INVA?p=INVA
GILD
https://finance.yahoo.com/quote/GILD?p=GILD

I have to admit I just bought GILD after taking into account the feedback I have gotten from yourself and others on this forum. I did actually start with a few profitable companies, but sold them as I mentioned before.

I think you are missing the point (or a significant part of it at least) of my strategy - as I explained before, one of the things I'm looking for is a company that is transitioning from being non-profitable to being profitable. When that happens it can increase the share price enormously.

In the biotech sector valuations of non-profitable companies are calculated differently than in other sectors, since a company can have a potentially lucrative idea/product that is known to work - but it just takes time to get it out there.

It's a strange way of doing things, but that's just the way the sector is, and illustrates why it's a good idea to know about the sector before you invest in it.

benbay001 wrote: »

How many annual reports have you read?

I've skimmed through a couple. Not many I must admit.

benbay001 wrote: »

What are you bench marking your returns against and how has it done over the same period?

Keep in mind that the portfolio was only 75% invested just a couple of weeks ago, and in many cases I have been buying stocks on their way down (trying to catch knives), so things were bound to be extra volatile till the portfolio settled down.

So initially I did not bother bench marking, but I did start bench marking against Polar Capital Biotechnology R GBP (which I also hold), and just in the last couple of days against NBI (as I mentioned a few posts above).

I did keep an eye on NBI, and initially it was a bit hit and miss, but even at the start there were more days I was beating NBI (and PCB) than they were beating me.

More recently, I've out performed (NBI - although PCB beat me yesterday) consistently over the last 3 days at least.

DATE___Me_____NBI
18th---+0.89% ---(didn't record but sure it was a negative day)
19th---+0.71% ---+0.51%
20th---+2.09% ---+0.74%

benbay001 wrote: »

For reference, im up circa 20% in the last month on my 3 stocks. An airline, an equipment hire company and a car parts company.

Sounds like you are doing OK. Got a bit of a "brexit/election" boost perhaps?

How much are you up since the portfolio was set up, and how long?

According to Yahoo I'm up +18.96% as of today, but I think that is a slight over estimate.

I guess it's not a bad start considering I have chopped and changed a little (which can't have helped). I decided to sell KALA and XOMA today (at a slight loss - about £150), but now I have a portfolio I am more confident in, although there still are a number of risky stocks (compared to the others).

If it works, there should be a screenshot of all of the stocks I hold below:

BrockStoker · 21 December 2019 at 5:16PM

benbay001 wrote: »

If you own 20 stocks and none of them are actually viable businesses and your only hope is that one produces a wonder drug then really its just a gamble

I would hope that the majority are potentially viable, and would expect at least a handful to go on and do OK. Perhaps if I'm lucky I'll get another Vertex, but I don't think success will hinge on that alone. Remember, many of the stocks I've picked have multiple pipeline candidates - they are not "one shot hopers".

Also, a few of my picks are of companies that are developing enabling technologies/technological platforms that have very good chances at disrupting today's treatments. CRSP (which I hold) is a good example of this. The gene splicing tech is already quite widely used, and changing the world as we know it.

In the same vein, I also hold TXG which is like CRISPR version 2.0, and it is more speculative than CRSP, but holds great promise as it is a much more accurate tool for scientists. I liken these companies to Illumina and what it is doing in it's field - bring down the cost of gene sequencing so that most can afford it. I think these companies have excellent business models.

Other companies I hold like CERS, which has a system for filtering blood products that is much more efficient than current systems, are rapidly expanding, and have increasing growth in new orders. Though not profitable yet, they are rapidly moving in the right direction it seems to me.

benbay001 wrote: »

Another point OP. Do you have a price for each of the companies, that if it reached that price today, that you would sell? And what do you base that price upon? There is no stock in the world that you shouldn't have a sell price for as every stock has a price at which it would become grossly over valued based on its current and future prospects.

I do have rough ideas on price targets on some of the stocks I hold, but for the most part it's a case of play it by ear, since a companies out look can change significantly overnight in this sector, so I think each price movement needs to be looked at in it's own context, and a decision made there and then.

Investing in biotech stocks - My experience so far

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