Investing in biotech stocks - My experience so far

BrockStoker

dividendhero wrote: »

Even if you know a particular biotech company and it's potential product in great detail and even if they've got the technology etc right...there's always the risk that another company off your radar has developed a better product

Absolutely. That is a risk, and I try to keep on top of it in a number of ways:

1 - Keep an eye on competitors. Of course there is always a chance I miss something.

2 - Investing in companies that are ahead in their field. If a company gets first approval for a new class of drug, it can often have a few years lead on it's competition, which in many cases will be enough so that it becomes reasonably established and hard to dislodge - at least till someone comes up with a significantly better treatment.

As you imply though, it is cut-throat, so I need to be on the ball, and keep an eye on the competition.

BrockStoker

Apodemus wrote: »

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!

It's the maximum external cash I intend to invest. Of course I want the portfolio to grow significantly before I take any profits.

Apodemus wrote: »

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.

Absolutely. While I have, and will gradually continue to add some "safer" large cap biotechs/pharma (in response to the feedback I've gotten here), I still want to maintain a healthy dose of riskier stocks which cold produce big moves, and I don't want to change the portfolio too much/too fast.

Apodemus wrote: »

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...;) ).

Very interesting to hear how these things work from someone who has been on the inside. Thanks for sharing - it's giving me more of an insight into how protective of information this sector is, and has made me more aware that I may not have all the information that is available to others in the sector.

Apodemus wrote: »

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:

Again I appreciate the feedback. I'm hoping I can find a comfortable balance between taking profits and leaving everything to run. What I'm finding is that it's difficult (and potentially harmful to returns) to have strict rules when investing in biotech, so I'm leaning towards rules which can be broken depending on circumstances.

By the way, in regards to AXSM, this is a screenshot from Dec 18 - the green dot is where I bought:



It's amazing how fast the gains accumulate once a stock is up a few hundred percent. Now if I can just find another AXSM (or two), and be in there early enough, I don't think it would take long to double the total value of the portfolio. Of course, that's easier said than done, but I remain hopeful if I can find one AXSM, perhaps I have already chosen others.

BrockStoker

Jaynishriya wrote: »

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

I'm also holding some WPCT (or what used to be WPCT), so like you hoping for a nice recovery. Right now it's looking like the recovery has started, so hopefully we won't have to wait a year, although I'm more than prepared to do so.

I just hope the new fund managers do not mess around with the portfolio too much, although perhaps there are a couple of stocks that might be better of being kicked out (I'm thinking Industrial Heat for starters).

BrockStoker

Clive_Woody wrote: »

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.

Clive, I nearly overlooked your post. Great story - thanks for sharing!

Clive_Woody wrote: »

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.

Yourself and others are making very good points here. It's certainly making me think more about how best to proceed, and the risks involved. I really appreciate the feedback.

I will still proceed with the plan, but will also try to find ways of mitigating risk while not harming potential returns too much. Despite the risks, I'm still looking forward to seeing what happens.

Linton

BrockStoker wrote: »

.....It's amazing how fast the gains accumulate once a stock is up a few hundred percent. Now if I can just find another AXSM (or two), and be in there early enough, I don't think it would take long to double the total value of the portfolio. Of course, that's easier said than done, but I remain hopeful if I can find one AXSM, perhaps I have already chosen others.

It is only amazing when you plot the graph on a linear scale. With investing what is important is not the absolute value by which a share has increased but rather the proportionate value. So for example a share worth 1p that increases to 2 p is equivalent to a share worth £100 that increases to £200 not to one that increases to £100.01.

So if you look on your graph AXSM doubled in value in the last few weeks, but you should compare that with a halving in value a few months earlier and much larger relative rises a few months before that. Ideally price changes should be shown on a logarithmic scale, but unfortunately such graphs are hard to find.

Another point to note is that normally there is little relatively trading in the company. The price changes appear to be due to what may be 1 investor buying a large number of shares prepared to pay way over the current price to get a significant stake. When the company hits difficulties such an investor could sell out with a catastrophic effect on the share price.

So be very careful and don’t let a single holding dominate your portfolio.

BrockStoker

Linton wrote: »

It is only amazing when you plot the graph on a linear scale. With investing what is important is not the absolute value by which a share has increased but rather the proportionate value. So for example a share worth 1p that increases to 2 p is equivalent to a share worth £100 that increases to £200 not to one that increases to £100.01.

So if you look on your graph AXSM doubled in value in the last few weeks, but you should compare that with a halving in value a few months earlier and much larger relative rises a few months before that. Ideally price changes should be shown on a logarithmic scale, but unfortunately such graphs are hard to find.

Thanks for the reply Linton.

I'm not sure how it would help seeing charts on a log scale, especially being used to seeing linear charts?

But your post prompted me, and I had a look - turns out there is an option to display on a log scale using investing.com charts:
https://uk.investing.com/equities/axsome-therapeutics-inc-chart

Linton wrote: »

Another point to note is that normally there is little relatively trading in the company. The price changes appear to be due to what may be 1 investor buying a large number of shares prepared to pay way over the current price to get a significant stake. When the company hits difficulties such an investor could sell out with a catastrophic effect on the share price.

So be very careful and don’t let a single holding dominate your portfolio.

Thanks for pointing that out, and for the tip.

It would be hard to stick to my plan without letting individual shares dominate. I guess the main problem is the amounts are too small - otherwise I could take profits, and re balance by reinvesting those profits into the worst performing positions, but the trading costs make this prohibitive in a portfolio this size.

I think I would have to let individual shares reach around 50% of the portfolio's total value, before taking profits, but even this is not really "letting my winners run".

It's fast becoming obvious to me why this can be a tricky sector to try to invest in individual stocks!

So apart from selling up and reinvesting in funds (which I'm already mulling over - but still reluctant to do), can anyone suggest an alternate strategy that might get around some of these problems?

Voyager2002

BrockStoker wrote: »

Thanks for the reply Linton.
It would be hard to stick to my plan without letting individual shares dominate. I guess the main problem is the amounts are too small - otherwise I could take profits, and re balance by reinvesting those profits into the worst performing positions, but the trading costs make this prohibitive in a portfolio this size.

Precisely.

Your strategy is one that makes sense for millionaires and hedged funds, but for those of us with more modest means it would be more usual to find a pooled investment --ideally an Investment Trust -- doing this.No recommendations: as it happens my best-performing investment was a Fund in the Biotechnology/Medical space that I bought a decade ago and have held ever since (although I later realised that I should have bought the corresponding IT with the same management that was on offer).

BrockStoker

Voyager2002 wrote: »

Precisely.

Your strategy is one that makes sense for millionaires and hedged funds, but for those of us with more modest means it would be more usual to find a pooled investment --ideally an Investment Trust -- doing this.No recommendations: as it happens my best-performing investment was a Fund in the Biotechnology/Medical space that I bought a decade ago and have held ever since (although I later realised that I should have bought the corresponding IT with the same management that was on offer).

That does seem to be the best way to play biotech at this level.

So despite all my own reservations at this stage, I still want to try, but will do what I can to reduce the risk as much as possible while still holding a portfolio of risky stocks. It will have to be a compromise, so I'll aim to take profits in a similar way to AXSM (get my initial stake back), and whatever is left I will allow to run, effectively "risk free".

Of course, there are plenty of reasons why that would not truly be risk free, but I think it would be the least risky way to hold these risky stocks.

If anyone has a a better suggestion (apart from simply selling up), please say!

Linton

BrockStoker wrote: »

Thanks for the reply Linton.

I'm not sure how it would help seeing charts on a log scale, especially being used to seeing linear charts?

But your post prompted me, and I had a look - turns out there is an option to display on a log scale using investing.com charts:
https://uk.investing.com/equities/axsome-therapeutics-inc-chart

When the price is generally rising linear graphs make recent rises appear far more significant than previous ones and you may not notice if they are in fact smaller as a %. The broader danger is that you fall in love with a stock as you focus on the graph and it eventually disappoints.

.......
It would be hard to stick to my plan without letting individual shares dominate. I guess the main problem is the amounts are too small - otherwise I could take profits, and re balance by reinvesting those profits into the worst performing positions, but the trading costs make this prohibitive in a portfolio this size.

So apart from selling up and reinvesting in funds (which I'm already mulling over - but still reluctant to do), can anyone suggest an alternate strategy that might get around some of these problems?

Only invest in individual shares if you have the money to hold sufficient to ensure that the loss of one is not a disaster. In your case it seems that this is more a bit of fun rather than a serious attempt at achieving financial independence. This is fine if you continue to see it like that but don’t neglect the rest of your portfolio.

BrockStoker

Linton wrote: »

When the price is generally rising linear graphs make recent rises appear far more significant than previous ones and you may not notice if they are in fact smaller as a %. The broader danger is that you fall in love with a stock as you focus on the graph and it eventually disappoints.

Thanks. I see your points. I am very weary about becoming emotionally attached to a certain stock. If there is one thing I have learned, it's to be completely emotionally detached from investments.

Linton wrote: »

Only invest in individual shares if you have the money to hold sufficient to ensure that the loss of one is not a disaster. In your case it seems that this is more a bit of fun rather than a serious attempt at achieving financial independence. This is fine if you continue to see it like that but don’t neglect the rest of your portfolio.

I'd class it as a serious attempt to make gains, but I'm not relying on it for my future comfort. I can't deny that I'm having fun too, but at the same time I'm still keeping a close eye on my other assets.