Biotech Stocks

[Mark P.]

Dexter,

I wanted to get your take on the biotech industy and whether or not you like stocks in this industry as investments.  Do you have any experience investing in this industry?  I personally have a couple of biotech stocks in my portfolio and they have done quite well for me over the last few months.  I just wanted to pick your brain and see if you had any experiences or stories you would like to share.

Thanks,

Mark P.

[Dexter]

Glad to hear you've had a good experience in biotech.  My experience has been pretty limited. 

A number of years ago, I researched a few small biotech companies because they were trading in the market as net-nets (i.e., their market capitalization was less then the discounted value of the their current assets minus all liabilities).  I was looking at them because they were cheap, not because I knew that much about their products (usually just one or two experimental drugs or therapies) or their prospects. 

I don't think I ended up investing in any of these biotech firms.  I think most of these companies went under or raised more money and severely diluted existing shareholders.  However, there was one biotech firm that received FDA approval for one of its drugs and the next day its stock price went up 7x. 

If I were to invest in a biotech stock (especially one that didn't have consistent profits for the foreseeable future), I would need to buy it on an asset basis (for example, when it is a net-net) and I would need a large margin of safety in my purchase.  In other words, I'm not willing to pay for uncertain future prospects, just net assets (and at a discount). Any upside beyond net asset values would just be gravy. 

Biotech companies can be extremely lucrative if you pick the right ones, but how do you do that consistently?  Biotech stocks can be very tricky to get right.  Many times, these companies go public by telling their initial investors that they have this revolutionary product or drug that just needs some additional development, testing and governmental approval.  However, the company's projections and financial forecasts are usually too rosy.  In reality, many of these companies are consistently losing money (in the form of R&D and SG&A expenses) in the hopes that their drug works, gets FDA approval, and then is embraced by customers.  There are a lot of hurdles to clear in order to achieve success.

I don't have any specific expertise or industry contacts in the biotech space -- I'm a true outsider.  So, there is a very low probability of me guessing which company or companies are going to succeed.  And even if I was an expert or insider, it could still be extremely difficult to pick the winners.  In fields with constant and dramatic change, the future is not that clear. 

I know some people try to trade biotech stocks based on investor expectations or quarterly earnings, but that's not my game. 

If you have any specific biotech ideas that you want to share, please feel free to post them in the Investment Ideas board by stock ticker and name.

[Mark P.]

Dexter,

I appreciate the feedback and opinion on the biotech industry.  I would be happy to share with the forum one or two biotech stocks that I currently have in my portfolio, and as you suggested I will put that in the Investment Ideas with the name of the company and the stock ticker.

While I feel like the biotech sector is extremely volatile in nature, I feel that with some research it can be discovered which ones are possible winners and have a bright future ahead of them vs. the ones that keep losing and sucking investors money down the drain over the course of many years. I think it's important to obtain an intimate knowledge of the product the company is presenting by going deep into the SEC filings.  Personally I like the high risk high reward aspect that biotech stocks present, and that is what has drawn me to them.

Look for my post in the next week or so when I introduce of the biotech stocks I personally really like.  Enjoy the long weekend.

Mark P.

[Dexter]

I look forward to your post on your biotech stock.

I'm interested to hear what characteristics you look for when investing in this industry.

Hope you enjoy your weekend, too.