When the market is rising, relative valuation is a useful guide. But as we have seen before, one needs absolute guideposts in a falling market. Analysis of the relationship of capitalization to cash helped many of us make money, or at least hold on, during the last biotech doldrum.
Several years ago, many companies were close to 1 times cash. I'm sure you remember how depressed biotech was. Some examples -- NBIX at $4-5, and NRGN at a similar level.
Now many companies are at 2-3X cash. If the company has a business model with a chance to be executed, if the company has a broad pipeline where one or two failures can be tolerated, if we see signs that money from exec. options are returning into stocks (like SEPR), that will be a good buying opportunity.
I believe there will be a huge boom, eventually. Interest rates continue to fall, not just in the USA, but around the world. Scientists are ready to do the work, if their programs are financed.
The problem is that those who would build the future economy need cleaner balance sheets in order to avail themselves of lower-cost capital. A good example, in fine, is the current discussion of BTRN. A share offering will be dilutive at the current quote, and a private placement may be worse. So, even though the government is borrowing for ten years at 4.75%, the effective rate for BTRN is many times that. An extreme macro example is Japan, where capital is virtually free (except for the hidden cost of deflation) but businesses are not coming forward to use it because their prospects are so poor and they are already highly leveraged. That is not the case for biotech.
I think there will be some workoff of overcapacity and some de-leveraging before we boom again. If anyone has a different macro view, I'd like to hear something more cheerful.
In this environment, biotechnology could be viewed favorably. The over-capacity is not in inventory -- it is in competing companies and competing programs. There is still the opportunity to benefit by picking the best programs at companies that have the money to advance them.
I particularly point to MLNM, which is trading at 3.5 times cash, with relatively low burn because of multiple, large partnerships. I don't know if $23.50 will be the best buying point that presents, but it will eventually be regarded as a good price. The funds-in-trouble, selling to raise funds for IRS, and margin call phenomena may persist. My strategy is to pick long-term holds and average-in by dividing my capital amongst two or three purchases of each company.
DISCLAIMER: I am a total idiot who has made a lot of money in biotech over time by sheer luck. |
