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Talking Biotech with Cynthia Robbins-Roth
by Emily Hall | 09-18-2000 | E-mail Article to a Friend
Cynthia Robbins-Roth, author of From Alchemy to IPO: The Business of Biotechnology and founder of BioVenture Consultants, has been involved in the biotech sector for two decades. In a recent e-mail interview she shared her thoughts about the future of biotechnology and offered advice on how to invest in this exciting--and volatile--industry.
Biotechnology has become one of the hottest areas of the market. How did this come about?
This is not the first time that biotech has raced to the top of the charts: We have seen big peaks in public biotechnology investing in the early 1980s, the early 1990s, and then again just this year. Part of what gets investors so worked up is when they are reminded of how powerful this technology can be by some astounding new discovery. This time around it was the Human Genome Project and all its implications for disease treatment.
Another important aspect is the cyclical nature of all stock sectors. Biotech goes up, biotech goes down. Tech stocks go up, then down. Industrials go up, then down. And this usually doesn't happen all at the same time. None of these changes can be timed, other than in retrospect. The obvious implication? Smart investors diversify all the time, but most investors simply pile into hot arenas, then grasp for a new sector when the first one tanks. The tech stocks had a huge sell-off when folks finally figured out that Internet companies still needed to generate revenue in our lifetime. And there was biotech, churning out great science with a pipeline of near-term product candidates.
What areas are the most exciting in biotechnology today? Where do you see the next generation of biotechnology companies focusing their efforts?
I think that the big excitement will be in two key areas. The first will focus on creating the tools to funnel the enormous amount of information generated by genomic and affiliated research into something with clinical value. This will require handling vast amounts of diverse data and will drive convergence of biotechnology and computer technology.
The second arena of incredible opportunity lies in the so-far untested uses of biotech to create devices that don't yet exist. Nanotechnology, driven by a molecular understanding of how our cells work in sickness and in health, can lead to the creation of new approaches to cell engineering and transplantation. For example, the only real cure for diabetes will require the creation of a device that acts just like a real pancreas, one that would need to respond on a second-by-second basis to changes in blood sugar levels. Imagine an engineered pancreas that sits in the body and responds continually.
What are the biggest challenges that the sector faces?
One huge challenge is getting the newer [biotech companies] to realize that they are just as susceptible to the uncontrolled down cycles as all those companies that have been in the industry for the past 20 years. Just because the market loves you now doesn't mean it always will. Fads can be a great way [for a biotech firm] to raise money if you happen to hit just at the right time. But there had better be a real plan for creating a sustainable operating business, and an ability to recruit the right team to implement it, or you will hit that wall sooner or later.
Why would individuals want to invest in the biotechnology sector?
There are two reasons. First, to participate in the greatest adventure ever. How can you beat the chance to do well by doing good? The idea of investing in companies that might discover treatments for cancers, Huntington's disease, ALS, spinal-cord injury, and diabetes is far more appealing to me than investing in widgets.
Second, it's important to diversify your portfolio, and you need biotech in there along with tech, communications, and retail, etc., so that your entire portfolio doesn't tank all at once. Of course, this implies that biotech alone won't work. But the factors that drive biotech are so different from those that drive the other sectors that [owning] some strong biotech stocks can be very useful.
What advice do you have for first-time biotechnology investors?
Assume that you will never really understand the technology enough to be able to figure out firsthand which companies have great science. So instead, you need to focus on things that don't require a Ph.D. in biochemistry to decipher.
First, get a good basic primer on how the drug-discovery process works, on how the clinical development and regulatory processes work.
Second, take a close look at management. Are they as strong as their technology claims to be? Do they have relevant experience? Remember, big pharmaceutical sales and marketing experience may not be the best preparation for running an entrepreneurial biotech discovery engine, so make sure management's experience is relevant for the company's stage of development.
Third, does the company have a strong patent portfolio? Great science won't help if you can't use your own discoveries because someone else can block you.
Fourth, look for a broadly enabling technology platform--science that can support creation of more than one product. The risk of product failure is high in pharmaceuticals, and any company putting all their eggs in one basket will be wearing yolk in a serious way.
Fifth, look for biotech companies that have significant deals with big pharmaceutical or big biotech partners--deals with more than $20 million in committed payments. This usually is enough of a stake to suggest that the big partner liked what they saw in the smaller company, and you can use them to do your scientific due diligence, in essence.
Sixth, you probably should ignore online biotech chat rooms. Trying to figure out who is telling the truth is harder than understanding which signal transduction pathway to NFK-b is a good target for selective inhibition of inflammation.
Seventh, don't pay a lot of attention to quarter-to-quarter earnings. This should be intuitively obvious: Most of the companies are still in the product-development stage. There are no significant revenues, thus no net earnings. Increases in losses may actually be a good sign--the company may be moving into clinical trials and thus jacking up spending. Instead, follow the company's financial reports and press releases: Is it making its milestones or does it consistently need to push them back? Are all of the clinical trials reported in patient groups of less than 25? Has the company switched to a strategy of repositioning as an Internet company (or any other fad du jour that is unconnected with its previously technology, expertise, or strategy)?
Eighth, if you are a real biotechnology fanatic, start reading news from the trade sites such as www.biospace.com , www.doubletwist.com, and www.bioworld.com (which requires a subscription). These sites have news written by journalists who specialize in covering biotech, who follow the rules of conflict of interest in journalism (which means they should not own any biotech stocks--ask if you aren't sure), and who have no vested interest in the companies.
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Emily Hall is an analyst with Morningstar.com. Although she would love to hear from you, she cannot comment on individual portfolios. She can be reached at emily_hall@morningstar.com. |
