|A guide to investing in
Extracts from Bioshares and other
contributed articles from the Bioshares team
|Four Events that can Trigger
a Biotech Stock Re-rating
published in Bioshares 34, August 8 2003
in biotech stocks poses some interesting challenges. Valuation of
a company is very difficult. Some assets are easy to value for example,
cash, investments in other companies, property and equipment. Intellectual
capital, which includes patents issued as well as pending, trade
secrets and ‘know how’, freedom-to-operate and strategic
position are much more difficult to value.
Investing in any asset is a risk
evaluation exercise and biotech is no different. An alternative
means to gauge investments is to place them at them on a scale of
0 to 100, where 100 equals maximum risk and zero equals ‘risk-free’,
and begin to evaluate and value the company or asset by subtracting
risk. In financial markets most investments are compared to government
securities, ie 10 Year Treasury Bonds, from where the term risk
free rate is derived.
For example, if a company sells
products and generates cash flow and has done repeatedly for many
years, and has grown sales and profits, then subtract 60 points.
If the same company is granted a monopoly for its products in a
major market, subtract another 10 points.
Much of the analysis of biotech
stocks is risk subtraction, so what follows is a short guide to
some events that subtract risk from biotech events. When they occur,
an effective market should move to re-rate these stocks (ie the
price of the stock should increase). Of course, that has not and
will not always happen, because companies can be subject to a number
of potential up and down re-rating events at the same time. And
as recent events have shown, if there is weak or no demand for equities
or a sub-set of stocks then no amount of good news will shift stock
Issued in the US
Patents are a fundamental component of a biotech company’s
asset. When granted they allow a company 20 years to exploit its
invention (i.e. a drug) free of direct ‘exact copy’
competition. The largest and most lucrative pharmaceutical and healthcare
market in the world is in the US and to not aim to secure rights
for a product in that market would be financially very limiting.
Issued patents do not prove or
indicate the commercial or technical prospects of a new biotech
product. However, they are critical to the partnering prospects
of small biotechs. In many cases, the prospective partners will
simply not look at a company unless and until a company has achieved
patent security in the US.
An IND is an Investigational New Drug application set before the
US FDA. An IND is similar to the Clinical Trials Exemption (CTX)
and Clinical Trials Notification (CTN) schemes in Australia. An
IND allows a compound to be tested in human trials in the US. Generally
before the US FDA will approve a drug, it requires that some of
the studies be conducted in the US (e.g. a Phase III study), although
this is not mandatory.
An IND is significant because
companies are required to meet with the FDA in a formal capacity
and present their plans to the authority. The FDA is a rigorous
organisation and companies must work to a high level to satisfy
the FDA’s requirements. An IND meeting can influence a company’s
plans and directions and impact on their chances of regulatory success.
Only a handful of Australian
companies have been granted IND status, the latest of which was
Starpharma for its microbicide, Vivagel. (see Bioshares 12 for an
excellent summary by Judy Bingham of the IND process)
a Lead Molecule
The confirmation of a lead molecule is a significant event that
concludes the drug discovery process and marks the cross-over into
human clinical trials. The lead molecule is the one the company
is declaring as the one most likely of many thousands to succeed
in one or more chosen disease indications. It follows years of disease
study, studies in bio-assays, medicinal chemistry work and pre-clinical
studies in at least two animal models.
Complete Phase I Trial
A Phase I trial is designed to evaluate the safety of a potential
therapeutic product, in healthy volunteers (Phase Ia) and in patients
(Phase Ib). Measures of the Maximum Tolerated Dose (MTD) and a Dose
Limiting Toxicity (DLT) are sought as are other indications of toxicity.
Phase I trials are usually conducted
relatively quickly and in small numbers and their successful completion
paves the way for the much more important Phase II trials, which
begins the evaluation of efficacy. Some preliminary indication of
efficacy can also be established in Phase Ib trials.
How can investors use the above information? Here is an example.
Company A has two granted US patents, an IND accepted by the FDA,
has completed three Phase I trials and has $10 million in cash.
Company B has $15 million in cash and has just identified a lead
molecule. Both companies have equally good boards and management.
Both are targeting the same disease. Both are capitalised at $40
million. On the basis of the characteristics mentioned above, company
A has subtracted more risk and therefore can be considered a preferred
investment if the target markets are similar in size.
Strategic Milestone in Drug Development: IND approval
published in Bioshares 12, January 2002
Judy Bingham – Kendle Pty Ltd
and approval of an IND represents achievement of a strategic milestone
in the drug development pathway, but one that should not be entertained
An IND (Investigational New Drug) is an application to the US Food
and Drug Administration (FDA) seeking approval to commence clinical
trials in the US.
The IND must contain information
in three broad areas:
· Manufacturing – information on the composition, manufacture,
stability and controls for manufacturing the drug substance and
drug product. This information is assessed to ensure that the company
can adequately produce and supply consistent batches of the drug.
· Animal pharmacology and toxicology – preclinical
data to enable FDA evaluators to assess if the product is reasonably
safe to administer to humans without undue risk. Also included is
any previous experience with the drug in humans, eg trials conducted
outside the US.
· Clinical protocols and Investigator information –
detailed protocols for proposed clinical trials to enable evaluators
to assess whether the initial trials will expose subjects to unnecessary
risks. The suitability of proposed investigators and ethical issues
are also assessed.
Review of an IND by the FDA,
generally takes thirty days, although it may take longer if additional
data or clarification of issues is requested by the Agency.
a PreIND meeting?
Prior to filing an IND, a formal PreIND meeting is mandatory. The
meeting provides an opportunity for the company to present their
development plan for the drug to Agency staff and seek advice on
questions such as:
· Is the preclinical program adequate?
· Is the CMC (Chemistry, Manufacturing & Controls) on
the right track?
· Is the proposed track to an NDA (New Drug Application)
marketing submission valid?
The quality of the background
briefing document, identification of specific questions and seeking
the agency’s support for the development plan are pivotal
to a successful outcome of the preIND meeting.
file an IND?
Clinical trials cannot commence in the US until an IND is approved.
Each country has specific regulatory requirements that must be met
before trials can commence in that country. In Australia, clinical
trials may be conducted under the CTX (Clinical Trials Exemption)
or CTN (Clinical Trials Notification) Scheme. There is no requirement
to file an US IND to conduct trials in Australia.
is an IND filed and maintained?
The Guidelines for filing an IND are freely available on the USFDA
Website. Companies must have a legal presence or sponsor to represent
them in the US and liaise with the FDA on their behalf. For non-resident
companies this role can be fulfilled by a consultant or legal representative.
Companies should not underestimate the quality and depth of data
required and the imperative for strategic planning to ensure the
data is appropriately presented and be optimally prepared to respond
to issues that may be raised either at the PreIND meeting or during
the evaluation process.
In addition, maintenance of an
IND requires regular Annual Reports, Safety Reports and updates
whenever significant new information becomes available. Ongoing
interaction with the Agency provides both valuable feedback to the
company, but may also place significant demands on a company with
should an IND be filed?
Australian companies developing products for global markets are
sometimes of the view that in order to register their product in
the US, all clinical trials must be conducted in the US under an
IND. The US will accept ‘foreign’ data and in reality,
the single most important criteria are that clinical studies are
conducted to ICH GCP, the international standards for Good Clinical
Practice, and that any FDA specific Guidelines are met. Commonly,
the FDA will require that at least one pivotal (Phase III) study
be conducted in the US, although this is not an absolute requirement.
Companies should thus consider
the merits of conducting early phase studies in Australia where
trials can be conducted to ICH GCP standards in a timely and cost
effective manner. Regulatory planning can also ensure that specific
FDA requirements are met. Timing of a preIND meeting and filing
of an IND for later phase studies can then be strategically planned
whilst the initial studies are ongoing, with potentially substantial
savings in development timelines and costs without loss in opportunity
for subsequent US involvement.
Perfect Biotech CEO
published in Bioshares 9, April 2002
many facets to biotech investing. A novice investor soon learns
about the importance of patents. They might soon learn that cancer
is not one disease but several hundred. They will learn that the
letters ‘FDA’ stand for the US Food and Drug Administration,
an omnipotent regulator that one does not try to force the hand
of. (Is erbitux Latin for ‘submit proper data’?). Another
early lesson will be that drug and therapeutic product development
takes time and is prone to optimistic milestone forecasting. Take
any estimate offered by a biotech company about anticipated milestones,
add six months, and you might end up being much more closer to the
actual date than you realise.
A key educational achievement
is to discover why there are many investments opportunities in biotech.
In biotech investment markets there are relatively more information
disparities coupled to relatively fewer ‘super-attuned’
investment opinion leaders who work to set prices of securities.
The situation could roughly be likened to a unique code of football,
played over a boundary-less kilometres wide field, in which some
rules seem to change frequently, with no restrictions on the number
of players, or balls, in contrast to any of the standard forms of
site-limited football. Some biotech investment winners will discern
the new rules, know when and where the new players will come from
and the balls they will play with.
The biotech investor who has
grappled with some of these salutary points will have also quickly
realised the importance of the CEO to the prospects of the biotech
company they have invested in. The position of Chief Executive Officer
is important in every company. In a biotech company there are some
major differences, and it is worth discussing some of the attributes
of a good biotech CEO. A caveat – there is no perfect biotech
CEO. Even moderately good biotech CEOs are very hard to find, not
just here in Australia, but in every country with an active listed
A sign of a good biotech CEO
is that if they haven’t already started the process, then
they are probably not far off commencing the search for their replacement.
They may be grooming an internal candidate, or building links through
and with other companies. Recognition of dispensability and the
limitations of tenure is a sign of professional maturity and good
leadership. Succession planning matters in a biotech because it
is a lengthy, complicated business that perpetually unveils new
opportunities. Unfortunately succession planning is not generally
a matter for the public record. However, when attending company
presentations, note if sections have been delegated to younger members
of the management team.
What is the main task for a biotech
CEO? Given that biotechs are high-powered vacuum cleaners specially
designed suck up cash, there is a very strong argument that a biotech
CEO’s primary role is to raise cash, manage at a general level
the optimal disbursement of that cash and ultimately get the best
returns for shareholders.
Is it important that they have
a PhD? It is very helpful that biotech CEOs have scientific, medical
or technology education. Commercial experience is also very desirable.
What is more important is a demonstrated capacity to learn and assimilate
new ideas. They also need to practise the art of delegation. What
is essential, even obligatory, is that they possess and exercise
communication skills at the highest levels. A biotech CEO needs
to persuade staff that they are engaged in a worthwhile commercial
endeavour. They need to convince existing and prospective shareholders
to supply funds, not once but many times over the commercialisation
life of a technology. They need to be able to explain what their
company does, why it exists, why it is different. They need to know
the difference between hype and justifiable excitement. And to a
great degree they will recognise their role is educative, knowing
how to continually grow shareholders’ appreciation of the
scientific aspects of their business or drug or device or diagnostic,
despite some investors protests to ‘not bother them with that
technical stuff’. A good biotech CEO will speak intelligently
on behalf of the entire biotech sector.
There is a knowledge aspect to
the attributes of good biotech CEOs. Its helps if they have a context
for their company in the Australian biotech sector, both from an
investment point of view and from a technology development point
of view. They should know what most other companies in the sector
do. The differences between most biotechs are simply not obvious
to many people and need to be explained. Good biotech CEOs will
identify and easily discuss their competitors. They will be aware
of key current events in the international biotech scene.
Should the CEO be one of the
company founders or inventors of the technology underpinning the
company. Answer – only when the company founder or inventor
also has requisite communication skills or learns them quickly.
More likely, however, a smart inventor hires a CEO, and gets the
best person for the job.
If you are travelling overseas
and see an Aussie biotech CEO in airport lounge, be very happy.
If they are on the road, at a conference in Boston, or cutting a
deal in Cambridge (UK), that’s good news. Hopefully, when
they trip over as they rush to greet you, the business cards of
the Licensing Vice-Presidents of the major North American pharmaceutical
firms will fall from a coat pocket. Another excellent sign!
Clinical Drug Development Process
George Mihaly and Judy Bingham – Kendle Pty Ltd
Clinical development and the conduct of human trials are a pivotal
phase in drug development. This article outlines some of the key
issues to be addressed in a clinical development program to ensure
that global regulatory requirements can be met and presents the
benefits that can be achieved by working with a Contract Research
A Clinical Development Program
(CDP) should be designed once a compound is near to completion of
initial preclinical studies and the results warrant consideration
of full development of the product. A CDP should be designed early
in order to create a profile of the product in terms of the intended
formulation as well as its expected therapeutic role (ie a “target
data sheet”). This will also provide direction for the program
of clinical studies that are needed to achieve it.
A CDP describes the target population,
formulation requirements, treatment schedule, desired indications,
and expected levels of efficacy and safety. In addition, external
factors such as requirements of the regulatory authorities will
dictate what data must be generated on a new product. Increasingly,
the policies of governments throughout the world support the principles
of “evidence based medicine”. The implications of these
policies is that new medicines must also be shown to represent value
A comprehensive CDP is designed
to collect all the necessary data required for a registration package.
Throughout the whole development process, progress and results against
the CPD must be constantly reviewed and assessed. This should be
in the context of critical decisions about taking the next step
and possibly making essential modifications of the plan in order
to achieve the target data sheet. If unexpected results are observed
in a study, this may require further investigation, either in the
laboratory or in additional clinical trials.
The pharmaceutical market is global and medicines must be marketable
throughout the world. The design and conduct of clinical trials
must therefore be undertaken in the context of an understanding
of global regulatory requirements, taking into account country specific
requirements, medical practice in the countries where the trial
is to be conducted and common global standards. The success of an
individual clinical trial and a CDP is therefore established as
delivery of the end product, the granting of marketing approval
in each of the target markets.
The International Conference
on Harmonisation (ICH) has made a major contribution towards harmonisation
of pharmaceutical standards in the three major regions of the world,
the USA, Europe and Japan. Many other countries including Australia,
although not a member of ICH, have adopted the ICH Guidelines. In
addition to the ICH Guidelines, many countries have their own national
laws. These may relate to the conduct of clinical trials and to
specific regulatory requirements. For example, metabolism studies
in populations where there are known ethnic differences in drug
trials in Australia
The environment for the conduct of clinical trials in Australia
changed significantly following the 1991 Baume Report, which concluded
that “Clinical trials are a vital element of the overall drug
evaluation process and…. provide significant access to new
treatments in Australia.” The Baume Report resulted in the
introduction of an optional deregulated scheme for the conduct of
trials, the Clinical Trials Notification Scheme (CTN) whereby clinical
trials which are approved by an Institutional Ethics Committee are
notified to the regulatory agency, the Therapeutic Goods Administration
(TGA). The TGA does not evaluate the available data on the drug
or the clinical trial protocol. Under the CTN Scheme, the number
of trials in Australia has increased from less than 100 in 1990
to over 1500 in 2000.1 Although the majority of these studies are
Phase III and IV, a significant number are early phase I or II studies.
The option to conduct a trial
under the alternative route, the Clinical Trial Exemption Scheme
is encouraged by the TGA for early phase studies where the data
has not been previously evaluated by another regulatory agency.
This option takes longer and is more expensive than the CTN, however
the benefits of TGA interaction and advice may be considerable in
contributing to the CDP.
Australia has adopted the ICH
Guidelines for Good Clinical Practice (CGP) and the conduct of all
trials in Australia should meet these standards. Australia also
has some specific requirements for regulatory submissions that must
be taken into account when designing clinical trials. For example,
the TGA is now requesting specific Australian data on local antibiotic
sensitivity and resistance patterns to be included in submissions
with five yearly updates. However there is no specific regulatory
requirement to conduct trials in Australia prior to registration.
Australia has an excellent international
reputation for the conduct of clinical trials, with recognised world
class medical expertise, experienced investigators, ethnic diversity
and minimal bureaucracy. In addition, a recent survey of the cost
of research in over 30 countries, demonstrated that conducting trials
in Australia is cost effective compared with Europe and the USA.2
trials in Europe
As in Australia, Europe has adopted the ICH Guidelines for Good
Clinical Practice. In addition to GCP, a series of rules and guidelines
have been developed. Many of these apply to all clinical studies,
whilst others relate to specific disease areas.
Clinical studies must be designed
taking into account these rules and guidelines, as well as any specific
country and local Ethics Committee requirements. The present situation
in Europe is complex and procedures for Ethics Committees vary significantly.
A new European Clinical Trials
Directive is currently being adopted and when fully implemented
by 2003 will encourage a harmonised approach to the conduct of clinical
trials in Europe.3 The principle purpose of the Directive is to
ensure that the ICH Guidelines are implemented into European law.
This should result in better acceptability of EU clinical data by
the Food & Drug Administration (FDA) in the USA.
Trials in the USA
In the USA, the clinical development of a new drug is governed by
FDA regulations. An Investigational New Drug (IND) application is
required by the FDA prior to administration of a new drug to humans.
Once approved, the IND must be maintained and regularly updated
as new information on the drug becomes available. Regular interaction
with the agency is encouraged and is required at defined times throughout
the clinical development program of new drug.
The ICH GCP Guidelines are based
on the FDA Regulations, and following these will satisfy FDA requirements.4
The FDA usually requires two pivotal (phase III), placebo controlled
studies, at least one of which is conducted in the USA. The FDA
will accept foreign data for inclusion in a regulatory submission,
provided the studies have been conducted according to GCP standards.
In some other countries, including Japan, it is considered unethical
to conduct placebo controlled studies. The ICH has issued a draft
guidance on the Choice of Controls in Clinical Trials.5 If adopted
by ICH countries including the USA, the implications for Phase III
clinical trial design may be significant. For example, the USA may
agree to remove the emphasis and requirement for placebo comparisons.
Competitive pressures and the imperative to increase revenues are
increasingly forcing companies to implement strategies to reduce
clinical development times.
One of the key factors identified
by Getz and Bruin as contributing to reduced development times was
identified as collaborative effectiveness, including the effective
use of Contract Research Organisations (CROs).6 Recent studies have
highlighted that drug development times for clinical trials can
be shortened by approximately 33% through the effective use of a
For large pharmaceutical companies
with significant internal expertise, working with a CRO can provide
additional resources to undertake specific activities as needed.
Smaller organisations may consider
working with a CRO that can provide specific expertise not available
in-house, for example in a particular therapeutic area or in a specialised
technical/scientific area. Organisations should identify what a
CRO can do as well as or better than the biotech or pharmaceutical
The benefits of outsourcing can
potentially be increased significantly if an ongoing relationship
is developed with the CRO, providing the CRO with an opportunity
to contribute to the overall development program as key expert members
of the project team. The sponsor/CRO relationship is crucial to
the successful fulfillment of a clinical trial or indeed a clinical
Choice of CRO should be based
on key factors such as scientific, therapeutic, technical and geographical
capability to undertake the work. In addition, factors such as the
size of the CRO and previous relationships, reputation and costs
should be considered.
Pressures on the pharmaceutical
industry will continue to transform the extent and ways in which
companies work with external providers in the R&D process. A
successful development team will most probably include a group of
specialist companies, individuals and institutes to ensure a company’s
objectives are achieved in a cost effective and timely program.
1. Alder S. International harmonisation in early drug development.
Presentation at ARCS/SHPA seminar, Melbourne 5 October 2000.
2. Ernst & Young, the Hays Group and the Strategic Industry
Research Foundation. Benchmarking Study of R&D Costs in Selected
Segments of Australian Biotechnology: Report January 2001.
3. Nickols PC. Some thoughts on the possible impact of the proposed
European Clinical Trials Directive. Good Clinical Practice Journal
2000; 7(7): 22-27.
4. Neher G. FDA GCP- a practical approach. Good Clinical Practice
Journal 2000; 6: no 3, 30-4.
5. Anon. Regulatory update: ICH E10 “Choice of Control Group
in Clinical trials” released for consultation. Good Clinical
Practice Journal 2000; 6 (3): 43-49.
6. Getz KA, de Bruin A. Breaking the development speed barrier:
assessing the practices of the fastest drug development companies.
Drug Information Journal 2000; 34: 725-36.
7. Barnett International Benchmarking Group. Benchmarks for outsourced
clinical trials: CRO versus sponsor clinical cycle times. In: Parexel’s
Pharmaceutical R&D Statistical Sourcebook 1999.
IPO Checklist for Investors
published in Bioshares 6, July 2001
there were a record 26 new listings and re-listings into the Australian
healthcare and biotech sector. This year to date there have been
five new listings, which is a very positive sign of the sector given
current market conditions, and seven companies have re-focused from
mining interests (or other) to biotechnology. With the continual
flood of new investment options within the sector that generally
comprises of intellectual property based on complicated science,
no current earnings, no products on the market in the immediate
future and long term projections of sales in the regularly mentioned
‘billion dollar markets’, investors can benefit from
atraightforward, although by no means conclusive, checklist for
new biotech investments.
Is the new biotech company backing into an existing, listed corporate
shell? Check escrow stock!
It is expensive to list a company on the ASX. A cheaper and faster
alternative for some cash-strapped biotech groups is to merge the
company with an existing listed company that is looking to change
direction. There have been a myriad of mining companies that in
the last 12 months sold off (or are in the process of selling off)
existing assets and have invested in biotech research projects.
The companies can either invest with existing funds or issue a prospectus
and raise public funds. The most recent company to use this approach
was Medical Monitors, which was previously Defiance Mining and re-listed
in July. An important point to check is whether all of the previously
held stock is held in escrow for 12 or 24 months. This means previous
shareholders can not sell their stock for the specified period.
If the pre-existing stock is not held in escrow, there may be a
sell down after re-listing forcing the share price down. This may
well have been the case for Analytica. Analytica re-listed in October
last year at 50 cents. Analytica was previously the public listed
company Wallace International Ltd which was de-listed in 1989. Following
listing as Analytica and raising $6 million in public funds, 78%
of the pre-existing shares were not escrowed. The stock has since
fallen to 10 cents and has stopped trading due to funding problems.
Is there a venture capital group on the share registry?
Venture capital (VC) funds invest in early stage companies providing
a source of funds to emerging companies and often provide corporate
and strategic management input. VC groups are experienced investors
that have generally done their homework before investing. VC’s
will also often sell down their stock upon listing or at the end
of the escrow period, re-investing the funds back into earlier stage
companies or make a dividend distribution to shareholders. If a
company is listing and VCs are on the share registry, this is a
strong, positive endorsement of the company. Recent biotech listings
that had VC groups on board included Sirtex Medical and Compumedics.
These companies increased in 2000 by 200% and 100% following listing
How secure are the patents and is there sufficient life in existing
The assets of most biotech groups consists of intellectual property
that includes patents. One of the leading biotech groups on the
ASX is Peptech which has a valuable patent relating to TNF-binding
compounds. This is clearly the company’s main asset. Peptech
has settled with two pharmaceutical groups that have agreed to pay
Peptech royalties from sales until 2013. Many biotech companies
list with patents that have not been granted and are pending, or
licenses from other groups to existing patents. There is no guarantee
patents will be granted. Licensing rights to patents is fine, if
only a small royalty is being paid to the patent holder, and investors
should consider the IP position of biotech companies before investing.
The life of the patents is crucial.
Epitan listed this year at 20 cents to develop a systemic tanning
product that will also prevent people from skin cancers. A major
concern with this company is that its main patents run out in 2006
and 2008 and their lead product may not even be on the market by
this time. Epitan is now trading at less that 10 cents.
Look for highly experienced and successful Board members
Examine the Board of Directors and look for experienced board members
that can bring relevant insight and input into the listing biotech
company. Two recent examples of successful listings had leaders
of the some of the most impressive medical device companies on their
Boards. The Sirtex Medical Board included Chris Roberts from ResMed
and Q-Vis included Catherine Livingstone, former CEO of one of the
most successful groups in the sector, Cochlear.
More advanced biotech companies fare better on listing
Companies with drugs in clinical trials, products close to market
or a commercial history have historically fared better on listing.
Early stage biotechs with only compounds in pre-clinical development
have generally failed to attract strong interest, with Peplin Biotech
being the exception. Even new companies such as Cellestis have performed
very well because their diagnostic product may only be one year
away from market. Companies such as Vita Life Sciences, Pan Pharmaceuticals
and GroPep all performed well because they have products on the
market and successful corporate histories.
Look for exciting research projects with massive markets
New listings need to inspire and excite investors. Interest in a
stock can be generated if there is a high unmet need for the company’s
drug candidates or if the enabling technology is leading edge and
first in its class such as Optiscan’s miniature microscope.
Prana Biotechnology, which is developing a treatment for Alzheimer’s
has more than doubled in share price since listing last year. Its
lead compound is now in Phase II trials.
Look for companies that disclose extensive information about their
competitors. In particular, look for information presented about
product markets and competing technologies. Companies that produce
‘simplified’ offer documents should be treated with
Although biotech companies and
their technologies can be difficult to apprecaite, difficult and
time consuming to obtain information about, and may be speculative
investments, following this investment checklist may help investors
pick more biotech winners than investment lemons.
on Small to Medium Cap Stocks
published in Bioshares 5, April 2001
retail investors should possibly concentrate on investing in small-to-medium
cap stocks, that is, anything capitalised at less than $500 million
– leave the larger cap stocks to the local and international
fund managers. If 75% of funds can’t outperform the market
index, what makes you think you can!
Funds are managed by professional
investment advisors and analysts with better information channels
than most retail investors. These people are paid six-figure salaries
and spend all of their time analysing the top end of the share market.
They are not necessarily smarter than the retail investor. The point
is these people have the time, the resources and the investment
muscle (or influence) to outperform the ‘mum and dad’
retail investor, who allocates a few hours a week reading the available
press, which is often second-hand information, and advice from stock
brokers that is definitely second-hand information about the large
The professional investors generally
will not invest in the smaller and mid-sized companies for three
reasons. Firstly they do not have the time to research all the companies.
If they were to invest in a small company, capitalised at say a
$50 million, they would only invest a small amount, say $1–$2
million, and they may have $1 billion to invest. That means research
needs to be conducted on 500–1000 companies.
Also, these funds can not invest
large amounts as the liquidity simply is not there. To move the
money in and out of these companies would influence the share price
drastically. Lastly, many of these funds have mandates to invest
in only the largest 150 to 200 companies.
There are now a number of investment
magazines in Australia, including Bioshares of course, that cover
the small and medium sized stocks. These include Ian Huntley’s
newsletters, the Rene Rivkin Report, and a number of others. Most
analysts with these publishers visit the companies they are researching,
interview the CEOs and provide varying degrees of quality of analysis
and opinion. If retail investors do not have the time to go and
meet the companies directly and do not have the investment expertise
to assess these companies, serious investors should capitalise on
these investment resources. Most publishers will in fact provide
sample copies so you can get an idea of the type of publication
and the detail included.
Investing against professional
investors in large cap stocks doesn’t leave you with much
of a competitive edge, generally. As Dr Mark Mobius, the managing
director of the Templeton Emerging Markets Fund says in The Super
Analysts (see book review below), investors need to know what their
Review - The Super Analysts
publishedin Bioshares 5, April 2001
financial investment books is often not easy and can seem more of
a chore than recreational reading – a chore but a very satisfying
task once complete. The information can be invaluable. The Super
Analysts, by Andrew Leeming, seeks to present the views and investment
perspectives of some of the world’s best and most experienced
analysts and fund mangers with a conversational easy to digest approach.
And it succeeds. It’s a book not just for the professional
investor and Bioshares recommend it highly for anyone that takes
If you read only one interview
from this book, make it David Fisher’s. Fisher is the chairman
of the Capital Group International Inc, the institutional arm of
The Capital Group Companies Inc, which has over US$500 billion under
management. Fisher confirms that investing in the stock market is
not easy. “What is implied by your question is that 77% of
the market can’t outperform the market, and by definition
they can’t.” Fisher makes the point that “you
should use the quarterly numbers to the extent that, when they drive
stock prices down, they are opportunities, not risks”. He
also says that “things I worry about are assuming that you
know a lot more than the market does, and not asking yourself the
question, ‘Could the market be right?’”
Below are some other snippets
from the interviews worth considering.
Stuart Baker from Australia’s
Macquarie Bank believes that certainty costs money. “You have
to bet, and buy in the face of uncertainty.” He also says
that “you’re only going to make money if you bring yourself
to the level that allows you to see what drives the market.”
Dr Mark Mobius from the Templeton
Emerging Markets Fund says that “one of biggest mistakes that
people make in the investment business is changing their minds too
often.” And very importantly he says that investors need to
find out what their competitive advantage is.
Lise Buyer from Credit Suisse
First Boston in California explains that investors need to be aware
of subtle tones made in broker reports. “At any time, I will
likely have a couple of companies that I work with where I’m
less than enthusiastic about the stocks, but there’s pressure
from the investment banking side to be friendly. So, it comes down
to the subtlety in the tone of the writing and the hope that investors
will be able to read the differences in the research notes. That
can be quite a challenge, because you need friends on both sides.”
Tim Jensen from the Oaktree Capital
LLC believes that “the wonderful opportunities are when the
perception of a company changes. That’s a wonderful chance
for outperformance”. And he says that investors should be
adaptive when something new comes along. (Think biotech!)
Pierre Prentice from Jardine
Fleming Capital Partners in Australia reinforces the mantra that
“the mindset has to be one of getting rich slowly.”
Prentice supports the argument of investing in smaller cap stocks.
“Generally speaking, the smaller the stock, the less researched
it is, the less information that is available, and the less perfect
the market is. So, opportunities appear that you can take advantage
of.” And he confirms the buy and hold strategy. “Yes.
You can make a lot of money by doing nothing. Just being with the
right stocks longer-term can be very profitable, whereas with broking,
you’ve got to do something every day to justify your existence.
That leads to output of dubious value at the margin.”
Murdoch Murchison from the Templeton
Funds Group points out that “we have a very disciplined framework,
which means that we rarely follow the crowd” and believes
that “you’re not going to gain exposure to the value-creating
companies by investing in the titans or the dinosaurs of today.”
An argument for investing in biotechs although not expressly mentioned.
Murchison also subscribes to
the buy and hold theory of Jensen, Prentice and Mobius. “I
think one of the toughest challenges is resisting the temptation
to tinker with your portfolio. All you end up doing is incurring
more transaction costs and enriching brokers.”
And what is a good hit rate?
“Sir John Templeton always says that if you get two out of
every three decisions right, then you’ll have a superior investment
record” according to Murchison.
Michael Mauboussin from Credit
Suisse First Boston in New York agrees with Jensen and Murchison.
“Some of the great investment ideas are when you buy something
when you’re going against the tide of what everybody else
believes. In fact, most of the great investors seem to have that
Mauboussin talks about an investment
approach for Internet companies, one which could also be extended
to biotechs. “And so his (Michael Moore’s) approach,
which makes a lot of sense, is to buy a portfolio of businesses
in given Internet space. Then, when one of them starts to emerge
as the leader, you pare back on the ones that seem to be the losers
and put the money back into the ones that look like the winners.”
And once again the buy and hold
concept is also expressed by Mauboussin: “Successful investors
aren’t making a lot of decisions, but they’re looking
at a lot of situations. They are busy in the sense that they are
always reading, thinking, and looking at the world, but they’re
not acting every five minutes.”
Finally Alistair Veitch from
BlackRock International Ltd in Scotland says that “the real
measure of success or performance will be down to the issue of how
you weighted your portfolio.”
|First published in Shares magazine,
By Mark Pachacz
in biotechnology stocks can be very profitable. Quantum leaps made
recently in cell therapy, and the mapping of the human genome which
will lead into functional genomics and proteomics, make it an exciting
field to follow. The potential outcomes are enormous although understanding
the technology can be a daunting task to investors. Biotechnology
in the past has been through boom-bust cycles where late entry investors
often get their fingers burnt on companies they know very little
about. So why does this happen and what are the golden secrets to
biotech investing? Well let’s consider some of the traits
of the sector and some of some rules-of-thumb you should know.
have biotechs historically experienced boom-bust cycles?
Historically biotechs have been through four year boom-bust cycles.
The advent of a new technology or biomedical breakthroughs captures
the imagination of investors across the board. All of a sudden biotechnology
becomes flavor of the month and prices begin to soar. With apparently
unlimited potential in an area where most institutional investors
struggle to understand the concepts, the roller coaster ride begins.
Simply put, prices overshoot because too much money starts chasing
too few stocks. Unlike the recent Internet craze where investors
were offered alternative investment opportunities via a smorgasbord
of Internet start-ups, this just isn’t possible in biotechnology.
Biotech companies are generally founded on decades of experience
and this expertise can’t be created over night.
The resurgence in the sector
just three months after the slump is a positive sign that biotechs
may be here for good. But the supply problem coupled with a lack
of technological understanding is unlikely to see this volatility
phenomenon change in the medium term. So how should you modify your
investment approach with biotechs? There is certainly an argument
for taking some profits when your biotech investment does hit pay
dirt, and changes to Capital Gains Tax legislation makes this now
a more favorable option.
the regulatory approval process
Understanding the technology is difficult. Understanding the significance
of the company claims and how those claims stack up on the world
biotech arena can be an enormous challenge. But knowing how the
drug development process operates and how it creates key milestones
can give investors tremendous insight into the external validation
markers they should be looking for.
The drug approval process follows
a formal and structured regime (see table below). Drugs being developed
proceed in quantum leaps. These advances are generally made public
through company announcements allowing investors to monitor the
progress of their investments. The development process as a general
rule-of-thumb takes about 10 years, although this is being reduced
with more efficiently conducted trials assisted by the major advances
in biotechnology in recent times. Pre-clinical trials can take around
four years, where a compound is first isolated and tested on animals
to give an indication of possible efficacy in humans. Compounds
then proceed through a three stage approval process, beginning in
Phase I trials on humans predominantly to gauge the compound’s
safety profile. In Phase II and Phase III the compound is tested
in people, starting in smaller scale trials leading to larger trials
on up to 3000 people. The final step is regulatory approval of the
drug in the specific country. This is conducted by the FDA in the
US, the TGA in Australia and in Europe approval by one of the member
countries’ regulatory bodies. Approval by one country in Europe
generally leads to acceptance of the drug throughout the whole of
your investments in biotechs
As the compound does progress through the process, value should
be added to that company. It may take 10 years for a drug to be
developed, but investors do not need to wait for final regulatory
approval before there is an opportunity to take some well earned
profits. So when is this likely to be for investors? History has
shown that the release of positive Phase II results often has the
greatest impact on a company’s value. It is not uncommon for
a company’s share price to double or even triple in the period
following the release of positive Phase II results. With 50% of
drugs historically failing in Phase III trials an argument for taking
some profits is well supported.
Another golden rule includes
taking profits before the FDA rules on a drug approval application.
By this stage all of the good news has generally been factored into
the share price. Historically share prices have not jumped of news
of a FDA approval. Conversely, share prices can fall between 30%
- 70% on a rejection by the FDA. Local company Biota is a good example.
The stock fell from $9 to $3 upon news of the initial FDA decision
not to approve Relenza. Prices tend to increase in the six months
after approval so there is clearly an argument for buying after
approval and not immediately before.
an edge – do your homework
To some, investments in biotechs are an adjunct to their short-term
gambling needs. A rumor from a friend of a friend can spread quickly
and all of a sudden you own part of a company that you know absolutely
know nothing about. We’ve all been there. That’s fine
when times are good and the stock is soaring. But what happens when
your favorite stock begins to retrace ground and even moves into
negative territory with startling speed? That’s when you get
that horrible feeling in the bottom of your stomach. What should
you do now? You were so far in front! Well this is when you make
If a stock falls by 50% you need
to have done your homework to know why you’re holding the
stock. This can be the buying opportunity of a lifetime and you’re
thinking about selling? Two examples of this are AMRAD and Bresagen.
The stocks fell to 50 cents and 80 cents respectively during the
recent biotech slump in the June quarter, 2000. Savvy investors
that bought in at the bottom are now sitting on 100% gains two months
a biotech portfolio
Biotechnology stocks are often viewed as speculative and high risk.
This is fair comment to some degree, but there are ways to reduce
the risk whilst maintaining an exposure to high growth opportunities.
In Australia, biotech drug discovery companies increased on average
62% in 1999 and in the US, the NASDAQ biotech index increased 100%
over the same period, while the All Ordinaries Index in Australia
increased by 13%.
In the Australian healthcare
and biotech sector you can choose from pharmaceutical stocks with
have biotech exposure such as CSL or Fauldings, hi-tech engineering
and manufacturing companies such as Cochlear and Resmed, biotechs
with a portfolio of drug compounds and investments such as AMRAD,
Novogen and Circadian, tax-free pooled development funds such as
Medica, Starpharma and the soon to list Biotech Capital, or more
focused biotechs such as Metabolic Pharmaceuticals and Biota.
Risk can be reduced by
investing in companies that are returning a profit and have a proven
track record, companies with a range of drug compounds, companies
with a platform technology, or by investing in a portfolio of companies.
Biotechs offer an attractive opportunity because a diversified equity
portfolio can be created almost exclusively from this sector, and
returns of over 1000% are possible as investors in Optiscan Imaging
found out last year. All stocks can only fall 100% but investing
in stocks than could increase 10 fold means large returns are possible.
Drug Development Approval Process*
of compound reaching market at beginning of phase
||Screen compounds, choose a lead compound, test drug
in animal models for efficacy, side effects and drug metabolism.
5 % - 10%
|CTX/CTN (Australia) IND (US)
||Submit Clinical Trial Notification or
Investigational New Drug application prior to initiating clinical
||To test the compound in healthy volunteers to establish
possible side effects and safe dosage levels
||To determine preliminary efficacy and to confirm
safety, tolerance and drug disposition from Phase 1 trial.
||To determine long term safety, efficacy and cost
effectiveness of a new drug in large numbers of patients.
||Assessment by regulatory approval body
||Monitor drug once regulatory approval has been received
for safety and efficacy
|*Source: Adapted from: DiMasi, J Clin Phrmacol Ther 2001;69:297-307