Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Biomaven who wrote (4960)	11/19/2001 12:56:59 PM
From: Biomaven	Read Replies (6) \| Respond to of 52153

Here are some extracts from my "interview." Note in particular my comments on SI and let me again express my thanks to all the SI biotech regulars (and in particular Rick) for the wonderful community that has been built here. What do you do for a living? How did you get interested in investing? What do you like to do in your free time? I have a pretty eclectic background. I work for a company (which I originally founded some ten years ago) in the area of employee stock option administration outsourcing. It was VC funded and eventually bought by a very large financial institution. Prior to that I practiced as a corporate attorney at a large law firm (I have a JD from Harvard). Before that I did graduate work in Computer Science. I have been investing in the stock market for some 20 years, always in individual stocks that I researched myself. Initially I focused on high tech, but for the last 4 years I have invested almost entirely (80%+) in biotech. I have always had a strong interest in medicine, which is what led to my initial interest in biotech. In my free time, I do extensive research on the internet, mostly in the medical/biotech area. What is your investment philosophy? How did you form your set of investment beliefs? How do you make the decision to buy or sell? Mostly I try to emulate Warren Buffett. Find good companies and buy them when the market doesn’t like them and sell when the market is head-over-heels in love with them. Of course you have to modify Buffett’s philosophy when dealing with biotech. He likes nice predictable companies in areas he can understand easily. Well, individual small biotechs are about as unpredictable and hard to understand as you get. However, a large basket of well-chosen small biotechs has pretty predictable fundamentals, and a moderate level of understanding of each is good enough. I try hard to look for long term trends and invest based on them. I’m pretty skeptical about market timing. We discovered you based on your involvement in SI's biotech boards. What draws you to biotech? What is your background in this area? The long-term fundamentals of biotech are tremendous. This is the century when many (if not most) common diseases will be cured or at least controlled. The “terms of trade” between large pharmaceutical companies and biotechs have changed radically in the last five years – biotechs now get a much larger share of any deal. Pharma are desperate for pipeline, and biotech is where much of the next few decades' drugs are going to come from. Further, a well-financed biotech is essentially unlinked from the rest of the economy, which removes a huge area of uncertainty. I am essentially self-taught in biotech. I have no formal training in the field and have never worked in the industry. However I understand enough of the medicine and science to be able to analyze most biotechs reasonably well, and I rely on scientist friends (most met through SI) when I need help. What is your typical investment timeframe? Is biotech more conducive to long or short term investors? I will typically hold companies for a long time – a few years. I’ll sell if a stock pops unreasonably on news, and I’ll take something off the table if the sector as a whole looks overheated. I have some friends that trade biotech extremely successfully on a short-term basis, but I’m not well-suited to doing that myself. I really think you have to do that essentially full-time if you want to be successful. One unusual aspect of the drug industry is that overall things happen very slowly, and you can analyze many years ahead. Right now one knows the universe of possible new drugs that might be approved over the next four or five years, and also when every existing drug is going off patent. The competitive landscape in the medium term is thus much more settled than in say high tech. Of course any individual drug or drug candidate could fail tomorrow, and many do. So there’s a contrast between broad predictability on a macro level and tremendous unpredictability on a micro level. If you have sufficient diversification within the sector, you get the long term predictability. How do you evaluate companies? What is unique about biotech companies that might cause you to evaluate them differently from others? Individual very early-stage biotech companies are extraordinarily difficult to evaluate. Everything depends on their science. As a company becomes more mature, you can start judging the quality of its individual drug candidates. One of the most difficult things in biotech investing is figuring out how much of what management tells you is true, how much is shaded, and what is it they are _not_ telling you. You don’t have the normal metrics of sales and earnings to guide you in evaluating an early stage biotech. Instead you often have to read the tea leaves to figure out what is really happening. You really need to read the 10K thoroughly and compare it to last year’s. You have to look at conference proceedings and journal articles to see how they square with what management is saying. You have to understand how clinical trials work and have enough grasp of statistics to be able to evaluate trial results and compare them with management “spin.” The other thing you need to understand is that the standard accounting system doesn’t do a good job of figuring out the “true” earnings of any biotech. This is because all R&D expenditures are expensed immediately, whereas really they should be capitalized and amortized over time (and written off if a drug fails). This is critically important for biotech because they spend proportionally far more on R&D than any other industry. The effect of this is that biotech earnings are way under-reported (or more typically, losses are way overstated). In terms of research, I make extensive use of the resources available on the internet. Medline and 10kWizard (full text searchs of SEC Edgar filings) are particularly valuable. (For example, you can easily find all the public companies who are working on a particular medical condition by a simple search for say, "melanoma.") Do you invest in other industries? Only to a very limited extent. About 90% of my portfolio is currently biotech. I do sometimes hedge the overall market or a particular sector to a moderate extent. How does Silicon Investor help you? Do you ever transact based on other people's recommendations? Any interesting stories? I absolutely could not have learnt about biotech investing without SI. There’s a wonderful group of very sophisticated biotech investors there, including a fair number of scientists currently working in the industry. (All of these use pseudonyms). Dozens of posters comb the internet for interesting and relevant new stories and repost them on SI. Most importantly, the regular biotech posters there show great ethics – there is never a question in my mind of pump and dump, which is a tremendous problem in other on-line settings. Anyone who invests in biotech without the benefit of the expertise available at SI is crazy. An important protection for investors who are just learning is that attempts by “outsiders” to pump and dump low quality biotechs are invariably rebuffed by the more experienced participants. The average quality of posts in most biotech threads is consistently high. I’ve never bought a stock blind based on someone’s recommendation. If someone I respect mentions a stock, I will of course check it out carefully for myself. None of the regular posters would ever say “buy this stock.” Rather they might say that they bought it themselves and why they like it. To your best estimation, what have been your yearly returns as an investor? Specifically, what have your returns been over the past year? On my stock/option portfolio: 1998: +68% 1999: +120% 2000: +64% 1/1/2001 to date: -10% These are based on Fidelity's year-end “Change in investment value” as a percentage of the beginning balance. Not exactly accurate as they don't account for the timing of withdrawals and additions. What is the biggest mistake you have ever made as an investor? The biotech market had a bubble that peaked in March 2000. I had some very significant short term gains that I didn't take because of taxes and because biotech fundamentals were improving (in particular balance sheets were dramatically improving). I did take some profits, but I should have cashed out more, or at least hedged better than I did. Selling at the peak would have yielded me a gain of around 200% for the three months. Peter