Investing in biotech stocks - My experience so far

BrockStoker

So another turbulent start to the week has given me the opportunity to top up further on cheap stocks, and I now only have 1.2k left to invest out of the 20k that went into my SIPP a couple of weeks back.

Stocks bought were:

ARROWHEAD

CLOVIS

1LIFE HEALTHCARE

BIOCRYST

10X GENOMICS

Trying to learn from my previous 20k S&S portfolio, instead of buying little bits here and there of many stocks (I currently have 17 stocks in the S&S portfolio), I've only got 8 stocks in the SIPP, and have over weighted a few of those. Early days of course, but the strategy seems to be working with my largest stock holding (Arrowhead), which makes up over 25% of the SIPP , up 10% by the end of the week overall. That one stock's gains means the overall portfolio is now in profit despite none of the other stocks making an overall gain!

Arrowhead is the stock which has me really exited out of all the stocks I hold. The more I learn about it, the better it looks. I've borrowed this summing up of the positives from the Yahoo Finance discussion board ( https://finance.yahoo.com/quote/ARWR/community?p=ARWR ):

1- ARWR has approximately $500 million in cash on the books to maintain ongoing operations for years into the future.
2- Successful and profitable JnJ and AMGEN partnerships with more milestone payments coming.
3- Nine drugs in the pipeline with many more planned and coming soon
4- ARWR has a highly relevant and safe platform in TRIM based on Nobel prize winning RNAi science that they are early to market with
5- Passionate, committed, talented, “rock star” leadership with a proven track record of success who are out presenting regularly to their industry peers and medical science thought leaders about ARWR
6- Strong business plan with relentless execution and ability to adapt to the market and it’s competitors
7- Ability to recruit, retain, or partner with the very best talented people to keep up with the growing business plan
8- Dozens of patents in place to pursue in the future
9- Very strong average analyst rating of over $68 by multiple top tier firms
10- ARWR has already helped hundreds of patients around the world suffering from terrible diseases such as HBV, AAT, and soon CF, NASH, RCC, cardiovascular diseases and many more.

On top of this (was posted 2 weeks back) there seem to be more positive news reports for ARWR almost every day, as well as major catalysts in the near future which I think are highly likely to lift the share price significantly, and I think the share price could spring back up very quickly given the chance, even without these catalysts.

As for the S&S portfolio, that finished the week down a total of over 21%, which I think is still not too bad considering the speculative nature of the stocks I hold in it. Should things continue to get worse I will start to add less speculative stocks such as Intuitive Surgical which continue to be pummeled despite being strong businesses with significant revenue growth/earnings.

For all the stock market chaos and gloomy predictions, I don't think this time is much different, and the old adage "buy when there is blood on the streets" still holds true.

Once again, good luck to all in these troubling times, and if you have the cash/nerve, it's still a good time to be buying I think.

BrockStoker

What a week! Once again now in profit overall between the two portfolios. The S&S ISA is down about £150, while the SIPP is up £1370.

At last Clovis (second largest holding over both portfolios) came alive, increasing in value over 50% during Thurs/Fri alone, and there should be more upside to come! The largest holding, Arrowhead, has also been going up, albeit a bit more gradually. Currently around +10%, but it lost 9% on Friday.

I know I have "gotten suckered in" to buying more, but at those low prices it was a no brainer, and I strongly believe that the biotech/healthcare sector will come out of this in better shape than most other sectors. After all, who else is going to fight future pandemics? A significant proportion of the stocks I hold are involved in (or considering) combating or assisting in the covid-19 effort, and I would be very surprised to not see further investment in those, as well as biotech/healthcare in general. This whole crisis has highlighted the need for greater investment into the sector.

So I will continue to hold, and even invest further if I see more opportunity, but I have a sneaky suspicion that we may have seen bottom already, in which case I will probably not buy more stocks with new money.

BrockStoker

This week has seen the portfolios move mostly sideways. Still slightly in profit with the SIPP, but down a bit more with the S&S ISA. The big mover this week has been Moderna, which has been taking up some of the slack from other stocks that have slipped slightly. Since Moderna announced that the first person had been dosed with the vaccine on 16 March the share price has been steadily climbing, and now stands at a hair under 90% total gain. It seems that the options market is reacting like a further spike in the share price is now expected, so I'll be keeping a close eye on it over the next few days.

As I mentioned in another post on this forum a few weeks back, Moderna is/was my favorite pick of the companies racing to produce a vaccine since they were a couple of steps ahead of the pack as well as having IMO the best tech which although not 100% proven (at this stage), all the prior indications/trials have given excellent results, suggesting that they really are on to something. For anyone reading this now and thinking of jumping on the bandwagon, it could be risky since the share price has increased already due to the covid-19 rush, so I would warn against buying now as the share price could easily come crashing down again if something does not go to plan (chasing profits is never a good idea), but if anyone took my hint before, you should make a nice profit now.

Moving on to other stocks, while many stocks in the S&S ISA are in the red overall, I still have two stocks that are currently over 100% gain: Veastem is + 128% gain, and Axsome is sitting @ + 119% gain. What's pulling me down in that portfolio is Clovis @ -48% (down about £1750), but in the other portfolio, ironically, it's my largest gainer @ nearly +19% (up about £470), thanks to buying more when it was heavily beaten down.

Looking back on where I decided to invest (or "gamble" as some might put it - although I'd have to argue that what I have done here is somewhere in between investing and gambling), I'm happy enough, although with hindsight, if I could do it again I would have been slightly more picky about the companies I chose to invest in (quality over quantity). Some were long shots, and have not weathered the crisis too well, with one (CRIS) filing for bankruptcy, and I would not be surprised to see at least one or two more go that way especially if the crisis gets worse. Thankfully most have relative strength, and I firmly believe biotech/healthcare stands to be one of the few sectors to come out of this crisis in over all better shape, so I really feel vindicated in my overweighting of this sector. I'm sure some of you out there thought I had to be crazy to take such a risk, but the more the crisis bites, the more I think I've made the right decisions (mostly), and more importantly, at the right times, although I'm not consciously trying to time the market.

Hope everyone is doing OK and staying safe in this crazy new reality we have come to find ourselves in!

benbay001

Ive just had a look at Arrowhead, and they raised 250M this year and 60M last year from selling more stock.
They also had a cash inflow last year of 158M for "deffered revenue" which i have no idea what that means, but it doesnt sound good.
If it wasnt for the shares issued and the "deffered revenue" they would have had cash outflows both years.
Worth checking what deffered revenue is. Maybe someone on here knows?

P/E of 39 makes me feel giddy.

BrockStoker

I would say that deferred revenue is not a bad thing. It just means another company owes Arrowhead cash, which should be payed at a later date. That's not uncommon in this sector as far as I'm aware.

Most of the stocks I hold currently have net cash outflows, and that is not by accident. It certainly is a risk as biotechs have high cash burn rates, but the flip side is that if they make it to profitability, the share price will reflect this, and the share price could move in a very significant way. I view this time in a companies live cycle as an excellent entry point. I believe most of my stock picks are no more that 1-2 years away from being profitable, and once the profits start to roll in, there should be a "snow ball" effect, especially considering the disruptive nature of the technologies involved.

Arrowhead is certainly one of my favorite candidates, and I think the PE ratio shows that other investors also think that Arrowhead is worth a significant premium. I see Arrowhead as a relatively safe bet in a sector where many companies could make even larger percentage gains, but at the same time carry many times the risk. Arrowhead itself is not a risk free investment by any means, but I very much like the risk/reward profile.

benbay001

So is deffered revenue the conversion of trade and receiveables from the previous year?
I dont get how revenue can be defered, you either make it in a year, or you dont.

BrockStoker

I can't answer your question, but hopefully someone else can.

One thing I would like to add, however, is that it's not a bad thing that Arrowhead raised cash before the crisis. Others that were low on cash, and did not raise cash are now viewed as much riskier investments.

BrockStoker

This week turned in to a good solid week, especially for the SIPP with Arrowhead leading the way in terms of share price appreciation. I think it was Wednesday (or Tuesday perhaps) when the SIPP shot up nearly 9% over the course of a single session with Arrowhead (currently up 34% overall by the end of the week) being the major contributor to that along with Clovis (up 30% overall in the SIPP). Overall the SIPP is now up by a little under 19%. The S&S ISA is also up, although not quite as strikingly, @ 2.9% gain according to Yahoo, but that is inaccurate due to me selling/reinvesting a couple of stocks. It should be a bit higher.

I was expecting Moderna to do something, but in the end it just spent the week consolidating. Instead Biocryst decided to announce that it was starting trials (funded by NIH) for it's antiviral drug Galidesivir to treat covid-19 patients, after close on Thursday. Galidesivir has already "demonstrated broad-spectrum activity in vitro against more than 20 RNA viruses in nine different families, including the coronaviruses that cause MERS and SARS", plus we already know it's safe and well tolerated by humans from earlier phase 1 trials so investors including myself are very excited by this development, and the share price was up more than 40% after hours. If the covid-19 human trials are successful (should know in as little as 56 days or less) I would expect the share price to go stratospheric, and I think there is a very high chance that they will be successful.

I've just cherry picked the best of the news, and there has been no significant negative news apart from one analyst downgrading Clovis, but I don't pay too much attention to most analysts and what they think! This was a good week as far as I'm concerned, and I can't wait for next week.

Lastly, for anyone interested, Morningstar has recently published a report on the possible impacts of covid-19 on the healthcare sector:

https://www.morningstar.com/articles/977295/coronavirus-has-limited-impact-on-big-pharma-and-big-biotech

Wishing everyone good Easter!

Radiantsoul

Deferred revenue is the difference between cash receipts and recognition on the income statement. If a company signs a partnership agreement with big pharma for a 50m lump sum for work over, say 5 years, then the cash increases when the amount is paid. But the income should be recognised over the term, for simplicity 10m a year and the deferred income is the amount of cash not recognised yet to the income statement.
The watch out should be if all the income were suddenly written back. This might imply the project has been cancelled. Or if the project is delayed the deferred income may stretch further into the future. 
On balance large deferred income balances are probably good as somebody or bodies with deep pockets is prepared to back the ideas. The bad news is that they will likely take some sort of cut further down the line. It is not dilutive in the traditional sense though.

bowlhead99

BrockStoker said:

I would say that deferred revenue is not a bad thing. It just means another company owes Arrowhead cash, which should be payed at a later date. That's not uncommon in this sector as far as I'm aware.

Sounds like you have that exactly backwards. They have received money (that's why it's an inflow in the cashflow statement) but from an accounting perspective they can't recognise it as revenue because they haven't delivered the product.  So they are deferring the revenue to a future period when it will legitimately be able to go through the P&L, if and when they've done what they said they would do. 

It's not uncommon to have deferred revenue in a sector where a typical model can be for a company to receive money up front to fund the work and then at various milestones in development or delivery, get more money. 

Still, if you're investing in a sector and are not actually evaluating the companies' financial statements to understand their position, or you're looking at lines on the cashflow or balance sheet without knowing what they're all about, guessing they mean the opposite of what they do, and saying 'maybe someone else can answer your question' if someone asks you what the biggest numbers actually mean... it's a bold claim to say that most of your portfolio has 'relative strength'.