Fair enough. I'll concede the point. I did find this definition of tiers at McCamant's website.
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bioinvest.com
Defining the Tier Boundaries
A number of different parameters have been used to define the tier boundaries of the biotech stock universe. The
categories are usually set up by market capitalization, but the boundaries for these vary. Some analysts set the line of
demarcation between the first and second tiers at a $1 billion market cap, others closer to $500 million. The division between the second and third tiers seems to be between market capitalizations of $200 - $250 million. The Russell 3000 measures the performance of the 3,000 largest U.S. companies and covers 98% of the investable U.S. equity market by market value. It is split into two sub-indices -- the Russell 1000 index, the larger 1000 companies which represent 89% of the market cap of the Russell 3000 index; and the Russell 2000 index, the smaller 2000 companies which
comprise 11% of the Russell 3000's market cap. When the Russell 2000 index was last "rebalanced" on May 31, 1998, the market capitalizations for the 2000 companies which made up the Russell 2000 ranged from a high of $1.4 billion to a low of $221.9 million. We would estimate that the range limits at the rebalancing that will occur at the end of this month will be a little higher than those of last year. This represents a nice objective way of stratifying the biotech stocks, where the Russell 1000 index represents the first-tier, the Russell 2000 index represents the second-tier, and companies which are too small to make the Russell 2000 index comprise the third tier.
Another way to look at tiers is by the fundamental risk involved in the individual companies. The first tier is comprised of profitable companies with multiple products either on the market or in development, which have only modest fundamental risk. From this perspective, the second tier consists of those companies that have a broad technology platform, multiple products being developed and multiple partnerships to provide validation of the technology. The third tier would then contain those companies with relatively narrow product focus, where one product failure would be a big blow to the company. While this emphasis on risk may be more important to long-term investors, it is not what most people mean when they talk about tiers of biotech stocks.
Moving toward profitability is an important factor in moving a company up through the second tier and into the first
tier. Product revenues generally drive this profitability, so having products on the market or at least in late-stage
development can help build investor interest, and in so doing, drive the stock price up. Product approvals not only
produce revenues, they demonstrate that the company can conduct clinical development and convince the FDA of its
merit, skills which can be applied to other products in the pipeline. Collaborations with partners whose investments
provide external validation of a drug candidate's potential can increase a company's visibility as well. Having multiple
partners is even better, should any one lose interest at some point in the future. The broader the applicability of the technology base or the more diverse the development programs, the more likely the company's future success, on the theory that "they can't all go wrong." Other factors which increase the stock price and help a company break into the second tier and move up to the first tier include Wall Street sponsorship, real or perceived merger and acquisition
activity and capturing the public's imagination. All of these factors can contribute to investor interest, as the company moves down the road that starts at research and ends at profitability. Generally, therefore, companies move into the second tier from the third tier as their compounds move through pivotal trials, as they sign significant strategic alliances and as they attract the interest of Wall Street. They move into the first tier as they commercialize products and show a consistent profit. |
