I have slowly moved my portfolio from a majority of technology with some biotech to one that has now almost 60% invested in biotechs. I only kept my network and telecom equipment stocks from my former technology holdings. This did not work well last year because the biotechs refused to go up while the network stocks went down.
I started with an investment style that just searched the best technology growth companies and pay whatever price was demanded for them. This allowed me to buy pretty cheap Microsoft and Intel shares. But on the other hand I paid far too much money for companies like Ascend, Cascade, Fore, USRobotics, PairGain and Westell. After being burned by a lot of expensive stocks I am now still like a chance of above average long term earnings growth but I am no longer ready to pay any price for that growth opportunity.
I started biotech investing with Ligand LGND and Agouron AGPH in 1996. Ligand is still in the same $10 to $20 trading range since 1996. The stock did poorly but the company is now in even better shape than it was in 1996. I did well with Agouron until I made the mistake to be impressed to much by Agourons progress and buying more at $50 which turned out to be pretty close to the top. I have the majority of my biotech money in stocks that are either profitable or reasonably close to profitability. On the other hand I have a very small amount of money in speculative plays that have a high risk of failure but such a tiny market cap that I can expect a high return on my investment if they actually bring a product to market.
I recently collected long term earnings estimated from many companies from nasdaq.com and previous earnings from the Wall Street journal briefing books. There I found that most of the more advanced biotech companies are either already reducing their losses or are about to do that in the next year or two. Some companies like Genzyme GENZ and Biochem Pharma BCHE have been profitable for some years.
With BCHE and GENZ I like the combination of PE and growth rate. GENZ has a current year PE of 19 and an estimate of 20% yearly earnings growth for the next 5 years. BCHE has a PE of 23 with 40% yearly earnings growth.
Incyte is a leading genomics company with strong revenue and earnings growth. You will notice its leading position if you look at its PE of 43. But I think the current dip is a buying opportunity.
Ligand is still my favorite biotech company but thanks to its disappointing performance not exactly my favorite stock. Ligand has excellent technology and an impressive product pipeline. They are expected to become profitable next year.
Sepracor SEPR just has a great business plan. Take existing big drugs remove the stereoisomer that is responsible for some of the side effects and negotiate a deal with the original owner. Once the improved versions are tested and approved they can begin to collect big money. They still have two year of heavy losses but if you take a PE of 25 and discount future earnings estimates back 30% a year you get a current fair price of $50 to $60 which is rising 30% a year. The current price is $40.
The biotech industry as a whole still looses $4 billion a year. But they have now reached a stage where the losses are declining and they will get profitable in the next few years.
Some important things to consider from Message 4774569
"The farther along a product is in trials, generally the higher the market cap. If you look at the best-performing stocks of recent years, these have been companies with products having positive Phase III data. Investors pay for visibility of products coming onto the market or a company that is about to turn earnings-positive," Jenner said. "That's because only about 20% of the products that enter Phase I clinical trials eventually become a commercial product. About 80% never make it."
While biotech stocks carry tremendous risk to investors, there can be significant rewards for investors who take a long-term approach, can weather extreme volatility and understand the sector.
Moreover, the timing is good, Jenner added, because in his analysis, biotech stocks are in a two-year "mini bear market" and are historically undervalued relative to large cap pharmaceutical companies."
Thanks to the high failure rate you can pretty much disregard anything that is still in preclinical development.
Biotech stocks like to go up 15% to 500% over night on good news but they rarely if ever keep their gains. Don't chase them. Just wait until the price comes back.
And avoid buying short before a FDA advisory commission decision. This is the most important part in the drug approval process. A positive recommendation has often limited upside while a rejection in general leads to a very serious and lasting price drop.
And thanks to the above fact absolutely avoid one product companies.
The things that I expect from a biotech investment are a reasonably high chance for long term success of the company and a reasonably low risk of total failure.
Andreas |
