While big, unprofitable tech IPOs dominated headlines this year, it might be time for potential investors to turn their attention back to the early-stage biotech sector. Barrons magazine estimated that since 2012, early-stage biotech companies that have gone public have, on average, raised more money and performed better than biotech companies whose initial public offering came closer to when they brought their products to market. Between 2001 and 2017, only 6% of biotech companies were profitable at the time of their initial public offering, according to an analysis conducted by Jay Ritter, a finance professor at the Warrington College of Business at the University of Florida. During the same time frame, the average three-year buy-and-hold return for more than 350 biotech companies that went public was 36.3% — beating the market by 14%.
As with every investment, biotech investing is associated with inherent risks. Our five-basic due-diligence principles can help you evaluate an early-stage biotech investment and potentially uncover the rewarding investment opportunity you were searching for.
1. A pipeline of products, programs, and patents
Look for companies with a patented product and program pipeline consisting of more than one drug. Companies with 2 or more products in or entering clinical trials are more diversified and can cope with setbacks more easily. If one product fails, the company will have other assets in development to try and recoup any lost value. Clinical trials are organized into three phases, and the National Cancer Institute compiled a great introductory video that should be studied.
Make sure the company is past the discovery stage and is either filing an IND or is clinical ready. Don’t invest in mere science experiments!
Finally, check the patent status of the products and make sure it’s current. If the company has no signs of a patent then the product is not protected and has limited value.
2. Good Management
Experienced managers must lead the company and have a history of working in biopharma. Look for early-stage companies in which the founders are still a part of the management team, and that they have recruited diversified executives with in-depth experience in financing, successful drug development, and commercialization. Make sure that the chief medical officer has education from a credible university and an abundance of clinical experience and published work around the medical indication targeted.
3. Long-term finance commitments
It is advantageous to opt for companies that have just completed financing and have a reliable investment bank or venture partner committed to the development of the company.
Depending on the phase of the drug development, it can take years and many rounds of financing to bring a drug to market or for a company to establish a partnership with an established pharmaceutical company.
Without fresh financing or a committed strong investment group, it could be difficult for a company to continue securing capital for growth.
4. Research latest scientific breakthroughs
Be cautious of companies developing drugs and raising capital for therapeutics that are in vogue or are in an over-saturated market with competition. For example, areas such as CAR-T immunotherapy are overrun with companies racing to bring the next drug to market, so it’s best to avoid these companies. Look where the crowd is not and find companies developing next-generation products addressing high unmet medical needs. Areas such as pain management, addiction, age-related or anti-aging, gene therapy, and viral infections in which there is a high degree of incidence in the population. Positive clinical data in these areas could provide shareholders a faster return on their investment. We advise staying clear of companies focusing on homeopathy as its efficacy is unproven.
5. Scientific evidence in reputable journals
Always make sure that the science behind the product being developed is published in a peer-reviewed scientific journal. You can quickly find peer-reviewed journals via google scholar, a google service that indexes academic journals. Reliable measures in assessing the credibility of a scientific journal include the impact factors (i.e., citation frequency) compiled by Thompson Reuters and the SCImago Journal Rank (SJR). SCImago developed the SJR indicator from the widely known algorithm, Google PageRank™. This indicator displays the visibility of journals since 1996.
Stay away from companies that have no scientific publications. We also advise speaking to an expert with a background (e.g., Ph.D., Professor) in either biology, chemistry, or medicine to evaluate a drug and the claims by a company properly. If you don’t have anyone to consult with one of our industry specialists could be available.
Our principles are based on experience and for educational purposes only. We encourage inquiries, suggestions, and comments.
DISCLAIMER: All insights, suggestions, and advice provided herein are for educational purposes only. Nothing contained in this article or within this web site should be interpreted as a recommendation to buy or sell any securities, nor make an offer, solicitation or recommendation of another kind. All readers should always do further research before making a final investment decision.
The author is not a United States Securities Dealer nor Broker nor US Investment Adviser. This letter and the attached related documents are never to be considered a solicitation for any purpose in any form or content.