Investing in biotech stocks - My experience so far

kinger101

^^
correct.
Monies received in respect of goods/services not yet delivered = deferred income.  It's a liability in the accounts.
Monies owed in respect of goods/services delivered = accrued income.  It's a asset in the accounts.

Thrugelmir

BrockStoker said:

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.

WHO official said yesterday at least 6 months of data to evaluate a human trial fully. 

BrockStoker

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.

Thank you for the clarification.

I'm looking at it as an overall positive since providing the company delivers, then it will be actual cash in the bank, rather than an "I owe you". If I have no reason to think the company won't deliver, is that not a valid stance? While actual cash in the bank is obviously a better thing, a company with many "I owe yous", providing there is a reasonable chance of those "I owe yous" being made good on, seems better to me than another company with no "I owe yous", all other things being equal.

In the case of Arrowhead, they have a reasonable amount of cash in the bank, as well as the deferred income, so I see that as a relatively strong position to be in, although not "perfect".  Am I really "that far" of the mark?

kinger101

Thrugelmir said:

BrockStoker said:

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.

WHO official said yesterday at least 6 months of data to evaluate a human trial fully. 

The WHO do not licence medicines so they do not determine how long things will take.  The FDA makes the decisions in the USA, and EMA in the EU.  Having said that, FDA's priority review process is six months (instead of ten), and there's usually two months on either side of that anyway.    But I think anything with a positive phase III trial relating to Covid will probably go through regulatory approval with unprecedented speed. However, it looks like the drug BrockStoker is referring to is entering phase II based on the press release.  Quite far from getting any review.

It is also possible for patients to access medicines which have safety data on compassionate use grounds, provided they are currently in trial, or are pending market authorization.  Indeed, this is already happening with Covid on a very small level.
https://www.nejm.org/doi/full/10.1056/NEJMoa2007016?query=RP

port_of_spain

BrockStoker said:

In the case of Arrowhead, they have a reasonable amount of cash in the bank, as well as the deferred income, so I see that as a relatively strong position to be in, although not "perfect".  Am I really "that far" of the mark?

It sounds (just going from other posters' comments) as though some of the cash in the bank is the deferred income, so it's not exactly "as well as".

In any case, there's nothing generally wrong with a company's having deferred income. It's that if you've been misunderstanding major figures in their accounts, then your examination of their accounts is not meaningful.

It's easy to think one has relevant domain knowledge (and even, to really have it!), and that one is putting in the work doing one's own research into a company (like all those posters saying "DYOR" encourage one to do). And yet one's investigation into whether a share is worth buying or holding may be so full of holes as to be completely worthless.

This is why we shouldn't be buying individual shares. (And I say that as somebody who also holds individual shares. So please laugh at me before you even consider laughing at BrockStoker!)

And the bar for how good an analysis of a share's value has to be before its worth acting on is rather high. It's not good enough for an analysis merely to lack obvious flaws. It needs to be better than the "crowd wisdom" of the buyers and sellers of the share, who have their own analyses and whose collective judgement determines the current share price.

BrockStoker

WHO official said yesterday at least 6 months of data to evaluate a human trial fully.

That's true, however, depending on what is being tested, there may have already been early human trials to test safety at the very least, which means in those cases it won't take as long as 6 months from now.

In the case of Biocryst's galidesivir, that has already been through early stage testing in humans for safety (during earlier Ebola trials IIRC), so the trials now are to determine how effective it is and dosage. The "56 day" figure I eluded to is when we should start to see the data, and *start* get an idea if the drug is working or not. It won't be the final decision obviously, but I think good data at this stage would be an extremely encouraging sign.

Thrugelmir

kinger101 said:

Thrugelmir said:

BrockStoker said:

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.

WHO official said yesterday at least 6 months of data to evaluate a human trial fully. 

The WHO do not licence medicines so they do not determine how long things will take.  

The statement was merely made to put matters into perspective. That instant definitive answers to long term safe solutions take far longer than people might imagine. The only guinea pigs being humans and how they ultimately react to the effects of the treatment. Few drugs have no side health consequences at all. 

BrockStoker

In any case, there's nothing generally wrong with a company's having deferred income. It's that if you've been misunderstanding major figures in their accounts, then your examination of their accounts is not meaningful.

I appreciate the feedback port_of_spain.

I do understand that deferred income could also be looked at as a potential negative, depending on context. I try to look at a company overall, and think it would be a mistake to fixate on a relatively small amount of deferred income, without looking at the bigger picture. Having said that, I admit that I am having to learn many of the finer points as I go since finances have never been a strong point for me. Hopefully it won't be a major stumbling block.

BrockStoker

Few drugs have no side health consequences at all.

One of the reasons I've been so keen to invest in this sector is that the drugs which are currently being developed, in general, tend to be safer/have fewer side effects than previous generations of drugs. That's a win for everyone, apart from the companies that are heavily invested in older drugs.

kinger101

Thrugelmir said:

kinger101 said:

Thrugelmir said:

BrockStoker said:

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.

WHO official said yesterday at least 6 months of data to evaluate a human trial fully. 

The WHO do not licence medicines so they do not determine how long things will take.  

The statement was merely made to put matters into perspective. That instant definitive answers to long term safe solutions take far longer than people might imagine. The only guinea pigs being humans and how they ultimately react to the effects of the treatment. Few drugs have no side health consequences at all. 

And I was pointing out regulatory agencies can have flexibility for unprecedented events.  For example, AZT phase III clinical trials commenced in Feb 1986.  By September 1986 the trial was cut short.  The FDA thought it unethical to hand people placebo and watch them die.  AZT was licensed by March 1987, but in reality, many patients were receiving it via compassionate use much quicker than this.

Once recruited, a trial on results of a drug on patients with a light threatening Covid infection are available very quickly.  The outcome is known when they are discharged or die.  It's not unreasonable to assume regulatory authorities would expedite approval and market authorization of anything which had a positive outcome.   

As for safety, most the things being tested have already passed Phase I.  All drugs have reported side effects.  This is balanced with the consequence of not getting the drug.  Without it, people wouldn't be getting compassionate use of the drugs still deemed experimental.