Before you decide to slap down your hard earned cash onto the poker table, here are some cold, hard facts about gambling in the big leagues…..
-Of the 150 companies that make up the NASDAQ Biotechnology Index, only 41 earned a profit in 2015.
-83% of Biotech profits were earned by just 12% of the companies on the index. (2)
On the other hand, those few biotechs who become market darlings really do pay. According to Investor’s Business Daily, some of the top performing biotech stocks of 2016 were, Tesaro (157% annual gain), Novan (146% annual gain), and Avexis (139%) annual gain. (3) Whether these companies will be able to sustain that eye popping performance, whether they will grow into behemoth biotech players, or whether they will be swallowed up by a Big Pharma looking for a new drug to sell, can be had to evaluate. But here are some tools to judge potential stars from scams or just plain disappointments.
- Who is involved? Carefully scrutinize the backgrounds and qualifications of the top executives and board of directors. Have they launched these kinds of companies before? Do they have medical degrees and academic credentials from well known institutions? Are the leaders of the company fully transparent in revealing relevant personal information? If they have a media presence, is their work being covered by legitimate journalists, or just featured in “pay for play” puff pieces?
- “Go back to school.” Biotechnology start up firms typically bridge that yawning gap between academic research and practical medicine. Therefore, many universities have gotten deeply involved in the business of biotech. The entrepreneurial reach of universities in this space goes far beyond just Harvard and Yale. In fact, the University of California, San Diego, the University of Pittsburgh, and the University of Washington were all top destinations for biotech research in 2013 (4). Reach out to the alumni office of your alma matter and ask about what projects they have cooking up in their labs; you might be surprised. Alternately, you might try visiting the campus of any universities near you; a wide swath of research universities would happily connect you with young publicly traded companies that they have spawned.
- “Adopt an Orphan.” Everyone is aware of the deadly effects of lung cancer, stroke, or alzheimer’s. But did you that that about 5,000 American boys are born every year with a nightmarish genetic disease called Duchenne Muscular Dystrophy (or DMD)? Although the youngsters will seem harty at birth, by age four they will exhibit muscle weakness, eventually stripping the boys of the ability to walk or even move. Most have died an agonizing death by age 12 after countless fruitless trips to the doctor. There was no hope, until lately when the FDA approved a drug by a tiny company called Sarepta. The end cost to insurers? $300,000 per year, per patient. The sky high price of the drug is justified because DMD is an “orphan condition.” A rare, baffling genetic disease that is absolutely devastating to a small group of patients. Because the group of patients is small, there is very little competition in the space. Because the therapy is “life or death” the insurance companies fear the bad publicity of denying coverage to patients. If you had bought stock in Sarepta Pharmaceutical in 2014, by now you would have tripled your money in three short years.
High risk, high reward!
If you enter the phrase, “find a cure for cancer,” into Google, you will be bombarded with literally tens of thousands of responses, some reasonable, many total crackpots. If you you type in “find a cure for Duchenne Muscular Dystrophy” you will get less than a dozen responses. This means that you, as an investor, will have the research advantage….if there is any legitimate scientific progress on the horizon for an orphan condition, it won’t be hard for you to find out about it. Try writing the American Cancer Society and enjoy the canned electronic response that you will probably receive. If you write the Cureduchenne.org, you are likely to receive a warm email from a tormented mother desperately trying to advocate for her sick child. Which would be a quicker way to find out about the latest scientific advances in the field?