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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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February 12, 2007

A Good Day's Work

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Posted by Derek

So, you're asking yourself, "Why do people invest in biotech and small-pharma stocks?" You could especially ask yourself that after reading this New York Times article from Sunday, which describes how Xoma (yep, they're still around) has vaporized $700 million dollars, and counting, in its 25-year history.

Well, here's why: as I write this, Onyx Pharmaceuticals is up a solid 90% on the day. They're partners with Bayer on the kinase inhibitor Nexavar (sorafenib), and the companies today reported positive data in treating hepatic cancer. This wasn't long after the drug had pretty much whiffed on melanoma, so the news came as a bit of a surprise (thus that 90% updraft).

My guess is that it came as a surprise to the people doing the study as well. Liver cancer is a bigger market than anything that Nexavar is approved for, and you'd think that it would have been one of the first trials run if it were considered a high-percentage play. But cancer is tricky, and we don't understand it worth beans. You have to do the experiments, and you have to realize going in that you only have a vague idea of how they might go.

So that's one reason that biotech stocks continue to get buyers - for the same reason that lottery tickets do. It would be interesting to know which one has returned more money over the years, although I'm afraid I already know the answer. But long-term, biotech has the edge, because (slowly and with infinite pains) we're learning what we're doing. . .

Disclosure: I have a financial interest in Bayer stock - I have no exposure to Onyx (damn it all) or Xoma.

Comments (17) + TrackBacks (0) | Category: Business and Markets | Cancer


1. Biotech Investor on February 12, 2007 2:46 PM writes...

I don't think investing in biotech or small pharma makes a lot of sense for people who don't know anything about biotech or small pharma. But I have made some of my largest gains by investing in these companies. There are a lot of advantages to investing in small companies with promising leads. For one, their small market cap prevents large institutional investors (with exceptions, of course) from buying into exciting companies without disrupting the share price or otherwise alerting people to their interest. These companies (again because of the small market cap) are followed by far fewer analysts, making it easier for a diligent investor to uncover underappreciated value.
Of course there are going to be unforseen problems with some companies. But if you take a late-stage-venture-capital sort of view, then the failures won't hurt your overall portfolio performance.
I think investing in biotech is far from gambling, but the rewards can be gratifying.

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2. TotallyMedicinal on February 12, 2007 4:01 PM writes...

Perhaps one thing worth mentioning is smaller companies working in areas of unmet clinical need. Often these will spring into life from academic departments focusing on some pathway that no one else is looking at. The step-change in valuations are what really gets the pulse going, just as with Onyx today.

One example would be the British company Renovo. I bought their stock on the basis that they have plenty of cash in the bank to develop anti-scarring products. According to their website blurb they are the only company in the world with clinical candidates in this area (theirs are in phase II and III), accessing what they anticipate will be block-buster levels of revenue.

Obvious disclaimer - do your own research - I have a financial interest in Renovo.

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3. Utenzi on February 12, 2007 5:16 PM writes...

Biotech stocks are fun but I regard them mostly as gambling with a patina of responsibility. I was fortunate enough to have bought Onyx on the correction back in December and sold it early today before it soared above $20.

I doubt the price will hold since it's a long way to market for Nexavar but I like your way of thinking, Derek. Biotech does hold a lot of medical promise.

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4. NJBiologist on February 12, 2007 6:27 PM writes...

...for the same reason that lottery tickets do. It would be interesting to know which one has returned more money over the years, ...

Well, if the odds of a compound going to man from phase I are about 5%, that would be about 1 in 20. Even allowing for post-marketing attrition, that's better than any lottery I've ever seen.

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5. MolecularScience on February 12, 2007 6:50 PM writes...

Most of those biotechs listed on the Nasdaq exchange are outright scams. Its an incredible waste (XOMA a good example) of money. Academia does an incredible job of wasting money too. Then the policy makers throw up their arms and say with a straight face "We just don't have the money" for basic science anymore.

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6. hibob on February 12, 2007 6:53 PM writes...

I've heard in the past a good strategy is to buy at the beginning of phase III, wait for the stock to climb on anticipation of approval, and then sell just before results are announced to minimize risks.
Does that still work?

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7. Hap on February 12, 2007 7:18 PM writes...


The odds are a lot higher than most lotteries, but the expectation value (odds times payout if you win) might not be so different. Lotteries probably pay out about 60-70% of what they take in, so you have to do better than that in biotech for your statement to be correct. I don't know if that's true or not.

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8. cg on February 12, 2007 9:39 PM writes...

hibob, yes I think's that a "relatively" safe strategy, though in this sector investing is closer to gambling than I think we'd all like to believe, regardless of your "experience".

I remember I tried your strategy with Scios a number of years ago when Natrecor was entering Phase III, and then the FDA sent it back for additional Phase III trials and the stock got cut down very, very quick.

Scios eventually got thru it and got a nice buyout from J&J, but that investment I ended up being in Scios a few years longer than I had intended.

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9. X-man on February 12, 2007 11:12 PM writes...

How can anyone cynically suggest that biotech is a net negative, when just 2 companies together (DNA+AMGN) are worth ~$200 billion together.

That being said, there really is no good reason to take a chance on single, small biotech stocks, especially when solid non-biotech companies like Cisco can double in six months (check out it's recent performance) with a fraction of the risk.


Biotech makes sense at the macro level - we all know that biotech, relative to pharma, moves faster, and has higher productivity. There's also no question that in aggregate, biotech fills a need of big pharma.

So, rather than pick a specific stock (Xoma, anyone?), just try a collection of biotech stocks, like BBH, which has doubled in the last 5 years.

As for lotteries and gambling, just remember the old saying: "Gambling is a sport for people who can't do math."

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10. Anonymous BMS Researcher on February 13, 2007 7:58 AM writes...

Derek wrote:

> Disclosure: I have a financial interest in Bayer stock - I have no exposure to Onyx (damn it all) or Xoma.

I have underwater options in BMS stock myself, but expect our stock to reach the pre-Dolan range where my options would matter around the time Long Island Sound freezes over...

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11. MTK on February 13, 2007 9:04 AM writes...

As Adam Smith's biggest fan, the mere fact that VC's continue to plow money into biotech is all you need to know. These guys aren't stupid. If it didn't make sense at a macro level, they wouldn't be doing it.

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12. TNC on February 13, 2007 11:00 AM writes...

MTK: Doesn't that just mean that they can't have their money sitting around in cash? Just curious -- I don't know much about VCs.

What do people think about Palatin Technologies and bremelanotide?

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13. weirdo on February 13, 2007 11:25 AM writes...

"we all know that biotech, relative to pharma, moves faster, and has higher productivity"

Do we, really? All of us? Wow, thanks for speaking for me!

Having worked in both Big Pharma and biotech, and seeing the "other side of the fence" from both sides of that same fence, I can unequivocally state that such a broad encompassing statement, like just about all other broad encompassing statements, is absolute hogwash.

There are a lot of dinosaur, slow-moving Big Pharmas. There a lot of inefficient, money burning, wasteful biotechs run by buffoons.

There are innovative, fun Big Pharma divisions doing cool things no one else is doing. There are well-run biotechs with excellent pipelines and quality scientists.

And I've seen no evidence, none, mind you, that one way is necessarily better than the other. Wastefulness, greed, and MBAs are found just as often at biotechs as they are at Big Pharma. They're just spread around town more evenly.

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14. MTK on February 13, 2007 12:22 PM writes...


It's true that VC's don't want their money on the sidelines, but it's there if they can't identify good places to put it. More to the point, however, is that they're still throwing tons of cash at biotechs when they could be putting it anywhere they choose. That includes nanotechnology, dot coms (there still out there), IT, widget manufacturers, etc. You get the point. The Life Sciences sector has been the biggest area of investment for VC's for many years and remains so. Like I said, these guys aren't stupid. If there was more money to made somewhere else, that's where it would go. If you're interested in some actual numbers see this press release:

That segues to another thing I notice on this blog. Scientists really like to bash MBAs, which IMO is really unfair. These folks are most often highly trained and ambitious people who are just as intelligent and creative as we are. Now let me clarify what I mean by that. I honestly don't think it takes super-smarts to get through graduate school in chemistry. It takes some toughness and perseverence, but smarts? No. It does take smarts to EXCEL in grad school and beyond, but just to become a "scientist"? Not really. I think the same can be said about every other profession, including MBAs. Don't get me started on HR, however. :)

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15. MTK on February 13, 2007 12:49 PM writes...

Just to expand a little on the first part of the entry I posted above. Here's a link to some graphs charting where the VC maney has gone.

In this instance it actually separates the life sciences into separate components; biotechnology, medical devices, healthcare, etc. Anyway, the upshot is that since the dot com bubble burst circa 2001, biotech and semiconductors are the two most heavily invested areas by VCs.

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16. hibob on February 14, 2007 4:53 PM writes...

don't VCs make most of their profits by
either selling a still private biotech to a larger company or through the IPO?

Neither of those options are available to normal investors, and neither of those are directly dependent on getting a product all the way to market.

The question Adam Smith would ask isn't whether VC puts money in at the beginning, it's whether it buys shares of common stock (like the rest of us).

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17. MTK on February 14, 2007 6:16 PM writes...

Hibob (drink),

You are correct that VC's are generally in early and then look for an exit, usually either a buyout or IPO. That doesn't change things, however, in the big scheme of things. They're investors too. They own stock. They just don't liquidate that stock when it goes public, either. A lot of times they'll get their money out right away, but there are times when they'll also hang on to a portion of it, if they think the value of it will go up.

It doesn't matter if you or I can get in or not, Smith would argue that the "invisible hand" of the market will determine things. So to answer the question that Derek originally posed, not only can you make money, but lots of people are making lots of money in biotechnology. If they weren't it would have stopped long ago.

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