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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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« Binding Assays, Inside the Actual Cells | Main | More Fukuyama Corrections »

April 3, 2014

Reality-Based Biotech Investing

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Posted by Derek

David Sable has some useful rules for investing biotech stocks (more here). On the surface, many of these may look more applicable to people who are managing larger amounts of money, because he's talking about what to do (and not do) when you're walking around the JP Morgan healthcare conference, and so on. But the lessons behind his advice are sound for everyone - for example:

". . .stop looking for code words, Groucho Marx eyebrow raising, or any other type of "body language" silliness from insiders."

The corollary to that is that if you're thinking about investing in a small company that acts as if it's doing this sort of thing, or has been touted to you on the basis of such, turn around and look somewhere else. (Even worse, if you find yourself working for a company like this, you'd better start making plans). This is a sign of what I think of as the "professional wrestling" school of investing - it's the world of the people who see the market as a titanic battle between Good and Evil, the Good being the people who own the wonderful company's stock, and the Evil, naturally, being the Evil Shorts and Paid Bashers. As with other forms of conspiratorial thinking, it's easy for someone with this attitude to dismiss good advice (if exposed to same) by saying that the person offering it is naive - not clued in, wised up, or verb-prepositioned in general. If you knew how the world really works, you'd realize that the recent moves in the stock are all so transparent - it's the money managers, you see, who are trying to shake the shares from the weak hands so they can accumulate it in front of the Big Announcement.

The world doesn't work that way, I think, or not at the retail market level, at any rate. It's not a show, and there's no script. Many people investing in small biotech stocks have a reality-TV view of the world, when reality would serve them far better.

Comments (9) + TrackBacks (0) | Category: Business and Markets


1. BuyersStrike! on April 3, 2014 9:33 AM writes...

The cult-like behavior, and fantastic ignorance, of retail investors is on display in speculative biotech to a degree unmatched in any other sector.

To paraphrase a great quote I saw once:

The world of small cap biotech is one in which retail investors believe that by buying shares they are active participants in a bold new future, blissfully unaware they are being passively fleeced by management in the mundane present.

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2. Hap on April 3, 2014 9:59 AM writes...

Reality is complex and not amenable to simple models, otherwise investing would be easy, not risky, and not lucrative.

Conspiracy theories and other emotional appeals in investing should be a sign that someone is getting (or going to be getting) fleeced (and if you're investing in something with such appeals, and you don't know who's getting fleeced, it's probably you). If you want to get emotional satisfaction, there are probably either cheaper or better (more useful, more likely to end well) ways to get it.

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3. John Wayne on April 3, 2014 12:16 PM writes...

The belief that one can simultaneously help other people, improve your own health options, and get rich by investing in biotech stocks leads to nonobjective behavior in that market.

When you mix in the suffering of real people, pump and dump financial strategies, and the sort of rebellious and defiant belief that us Americans are suckers for (It works! Big Badguys don't want us to succeed! We need your help!), it makes the situation even worse.

As a rule, I do not invest in biotech stocks and I do not give advice to people who do; too close to the forest.

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4. simpl on April 3, 2014 1:48 PM writes...

"Realize that almost everything worthwhile gets acquired before it goes public."
That is how it should be, financial markets are about win-lose, not win-win.

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5. Anon on April 3, 2014 2:00 PM writes...

@1 I would disagree. The tech sector (especially social media) have some pretty wild valuations.

I also disagree with David Sable MD about the point of "if a public company hasn't been bought out, they aren't worth the investment"
Pharma invests based on how their organization can improve the value. Unfortunately, this is mostly just expertise in late stage development and regulatory work coupled (with a lot of the talent having been dismissed over the last few years) with a large sales force.

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6. insideinvestor on April 3, 2014 3:41 PM writes...

You can't argue that many of these small companies are very successful at selling themselves off to cash flush dying big pharma's, even when there is nothing to their "science". The founders and shareholders get rich, and the "big pharma" gets some nice PR.

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7. biotechtoreador on April 3, 2014 4:05 PM writes...

"reality based biotech investing"?

Who wants that? It's the sheer absurdity of so many biotechs that makes for great profits, both long and short.

Great point on "Groucho Marx eyebrow raising, or any other type of "body language" silliness from insiders". Sadly, many analysts insist on describing management 'body language' to fill space in 'research' notes. Such crap.

Great job by Dr. Sable!

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8. Chemist Turned Banker on April 4, 2014 1:38 AM writes...

Having been an investor delegate at the JPM conference (affectionately known as "the zoo" on the buyside) in the past, I would agree with Dr Sable on this. The risks of getting jailed for budges and winks, let alone the risk of misinterpreting them, mean they rarely happen. The main value of JPM is to see everybody in the same place at the same time (and don't forget the myriad satellite events around the main gig) and the relative popularity of company meetings- why is the Pfizer presentation full to bursting, yet Novartis is empty? Why are 100 people crammed into a broom cupboard to listen to a company I've never heard of? The added annoyance (above being crammed into a hotel busier than Grand Central Station in rush hour) is the trend to press release "big news" at the conference. It invariably happens from a company on the wrong floor at a time when you have a meeting elsewhere.

Still, gauging investor sentiment (especially from US hedge fund investors who aren't very good at bluffing after a few beers) is always highly instructive.

Even if you never directly invest in small biotech companies, I strongly recommend reading the comments section of any negative article by Adam Feuerstein. If you believe the comments, Adam is the most evil man in recorded human history, who must by now be richer than Buffett on account of all the payments received from Wall Street to crush the dreams of plucky young biotechs. I suspect that truth is a little less dramatic ;)

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9. Anonymous BMS Researcher on April 4, 2014 8:45 PM writes...

Since Mrs. Anonymous BMS Researcher and I both work in pharma, we've already got our career eggs in that basket; therefore we put our money in totally unrelated places.

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