Coby, Biotechs and internuts are valued just like any other stock. You figure out the earnings value for their drug/technology pipeline over time, discount it by their chances for success and the competition, then run it through a regular CAPM model. Easy to value, hard to get the right inputs. The real problem is, Shaman is worth $54 on my model if its first drug is wildly successful and nothing if it is not. So, a lot of these firms are zero/one situations.
If you play Amgen, Biogen, Chiron, Genentech, Genzyme, etc., you just treat them like smarter drug cos. But I like the smaller names as you get more bang for the buck. That means lots of diversification. What I look for are:
1. Financing capabilities. Lackamoolah can be deadly.
2. Research Alliances. When a co. has a Pfizer or a Schering-Plough or a Merck KgA behind them, their chances for success go up.
3. Low visible competition. Sometimes competition comes from the Moon, but, in general, you can usually see who is working on similar compounds or different compounds addressing the same area.
4. Breadth of pipeline. I call this the Cephalon factor. I have probably made more money on CEPH than any other biotech. I have had to trade it, as it gets incredibly underpriced and then incredibly overpriced. And, like Ligand, it has a touty mgt. But both of these cos. are working on a large number of products in various stages and no one product is going to take them down. For example, Cephalon ran from $7, where I bought, to $49, and I was out way before that price, based upon its ALS drug. When that turned out to be a dud, the stock crashed. That was a big diappointment, but not the only game in the pipeline. Now, they have another drug facing the market and investors are saying "fool me once, shame on you." That makes it a bargain. Doesn't mean it will win, but the odds are much in my favor.
Another hint, HQH and HQL own bio stocks and other small med cos. and they sell at large discounts. Although I am conceited enough to think I pick better than they do, I don't know if I pick 20% better than they do, so I own at least one and sometimes both of the funds.
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