LRB:
If anyone tells you that they've got the sector figured out, run. The game is constantly changing. We're more and more at the mercy of what a portfolio manager at Franklin or for Wisconsin think of the sector as a whole, or of problems at an Amerindo, etc.
There are a few people out there.... Mark Edwards of Recombinant Capital and Karen Bernstein of BioCentury come to mind.... that see clearly. They know what has happened, and they see where biotech is competitive and where it isn't.
At SI, we can collectively bring superior technical and strategic analysis to focus on any given issue. However, the discussion lacks perspective of how money has been made in the past. Aries is way up on that learning curve, but they seem to spend time with companies that don't attract or hold my attention. With IMGN and RGEN, it's obvious that BVP is also interested in companies that have hit on hard times. However, their list of SEC disclosures focuses on companies that are either thriving or, at the time that the positions were taken, appeared likely to thrive. An interestig mix.....
In the beginning, we had companies like Genetic Systems (the original Blech company, and any David Blech-related commentary would fit in this thread) and Hybritech. They had patents that have largely proven worthless, major contracts that generated cash flows of as little as $1 million/year, very little cash in the bank, and market caps at sale of approximately $200-350 million. We now have platform companies with enabling patents, cash flows through labs that support massive research programs, big bank accounts, and market caps of $80-300 million (excluding the most successful of companies). Given that the yardstick for valuing a biotech has always been profit from existing pharmaceuticals and the success of AMGN, BGEN et al., the question is.... "why?".
Not to pick on any given company, but the answer is... LIPO, CYTO, and companies like them, companies that have attempted to force technologies into a market that doesn't need them. Early-stage biotechs have fallen off as if a Roach Motel was set out with gene bait, and the observant investor says "biotech stinks".
Given this environment, my current strategy.... early-stage stuff at platform companies is not being rewarded with a decent, IMO, "research premium", so I'm investing in it. This appears to have been at least one of Lampert's major foci. Time will tell if recent experiences with NRGN, AXPH and the like will sour him on this approach. Are the issues where he has taken a beating current bargains?
Downside....... very few biotech projects were squeezed out by effective competition at pharmas. They have largely failed on their own merits or lack thereof. We used to have a situation where pharma research budgets were relatively inefficient. That has changed.... pharmas are now very competitive with respect to bang for research buck. It's no longer a good bet that the infrastructure of a biotech favors innovation. So, while biotech has evolved to be competitive in the area of pharmachem, pharmas have been catching up in the areas of protein biology and molecular genetics. The number of companies pursuing a given indication has soared. This all adds up to greater risk of blindside for any given project, and I'd advise trying to add a little InCyte-like insight to your portfolio. If you can't get rich off of companies that sell databases rather than ethicals, at least try to invest in companies that have a diversified program and a fundamental technical advantage (platform) which can be applied to enhance that diversification.
If we do this and if I'm correct in assuming that good "research premiums" are discounted, we'll all profit handsomely. If we do this and 1986-like research premiums are again assigned without sufficient discrimination, we'll profit even if the sector fails to thrive long-term. It's been a couple of years since the crud rose with the cream, however.
Again, the foci of this thread will be (1) Lampert's portfolio, and (2) how does money flow in the sector, how is "private placement" leverage generated through innovative financing, and who wins and who loses? My thesis is that a historical perspective will really help to understand these issues. There are business structures out there that are constrained by the greed of investors or by past inneptitude of management. Further, there are certain individuals out there that are walking, breathing red flags.
Cheers! Rick |
