Winning Investing Home     Basic Training Main Page

How to Analyze Biotechs

Biotech stocks caught fire earlier this year. The American Stock Exchange Biotech Index more than doubled during January and February before losing steam in March.

Biotech stocks have a similar appeal to Internet and other technology stocks; the potential of tremendous rewards if you pick a company with a product that makes it big.

What is Biotech?
The biotech label usually applies to firms applying genetic engineering to the manufacture of drugs or other products. Most biotech drugs are developed by small companies hoping to come up with a blockbuster product such as a cure for cancer or AIDS.

Biotech investing is difficult for most investors, because few of us have the background to understand the issues involved in determining the potential success of a biotech product.

Nevertheless, there is a remarkable amount of information available on the Internet to help us become better biotech investors.

A good place to start is "The Drug and Biotech Investor,"
a weekly newsletter published by "The Bull Market Report," a newsletter focusing on technology stocks. Although their Bull Market Report requires a subscription, the Drug and Biotech Investor is free. You can get the newsletter by email, or you can access it on the site (www.bull-market.com).

Start by clicking on "The Drug and Biotech Investor" on Bull Market Report’s home page. The newsletter started publishing on August 31, 1999, and the current, as well as all past issues are available from the Drug and Biotech Investor page.

The best way to start is clicking Drug and Biotech Portfolio to review their portfolio selections. When I checked, the portfolio contained 19 companies divided into three sections: large-cap pharmaceuticals, and mid-cap, and small-cap biotech companies. The large-cap section actually includes the large biotech firms; Amgen and Genentech, along with large drug companies such as Pfizer and Merck.

The portfolio shows, among other items, the date and price when each stock was added to the portfolio, a 12-month price target, and the percent return of each stock as of the end of the previous month. The results were good, most stocks were up, and many showed triple digit returns. On the downside, most stocks were added to the portfolio last fall, and are now close to their 12-month price targets.

The newsletter was originally written by Dr. Eddy Arnold, Professor of Chemistry at Rutgers University. Arnold left the newsletter in late January and no changes have been made to the portfolio since then.

Scroll past the portfolio listings to see a single paragraph description and analysis of each company. The paragraph details the products under development along with an opinion of future prospects. An additional paragraph includes excerpts from the management discussion in the company’s latest quarterly or annual report.

Each weekly edition of the newsletter typically includes an overview of current market conditions, and a description of a company not included in the current portfolio. These discussions often read like recommendations, but none of the recently featured stocks have been added to the portfolio. Nevertheless, most issues provide good ideas for further research.

Here are some ideas for analyzing biotech companies.

Product Pipeline
All new drugs must go through a lengthy testing and approval process supervised by the Food and Drug Administration (FDA). Each drug must complete three sets of clinical trials called Phase I, Phase II, and Phase III, typically running 18 months, two years, and three to four years, respectively. Products successfully completing the clinical trials are submitted to the FDA for marketing approval, a process usually taking one or two years to complete.

Given these timeframes, it’s best to focus on companies with at least two products in phase III trails or awaiting final FDA approval. More is better, and you want companies with a steady stream of products in all testing stages.

Recap.com
The place to find information on clinical trials is Recap (www.recap.com), the site of Recombinant Capital, a San Francisco-based consulting firm specializing in biotech financing issues. Click on Clinicals to display Recap’s clinical trials database search tool. It’s amazing. You can look up all the trials for a specific company, search for companies with products in trials for specific diseases such as diabetes, arthritis, cancer, etc., or companies with products in a specific development phase, such as in phase III trials, waiting for FDA approval, etc.

Burning Cash
Most biotech firms have few, if any, products already on the market generating income. Companies without income to cover expenses are said to be "burning cash." Analysts often compare a company’s assets to its "burn rate" to determine how long the company can survive before running out of cash. They say it’s better to stick with companies with a least two years supply of cash on hand.

Recombinant Capital’s "Signals Magazine" (www.signalsmag.com) lists a "survival index" for 250 biotech companies. The survival index measures how long, in years, a company can last on its existing cash.

You can see the survival index by selecting Contents and then Financial Snapshot in the "Signals vs Noise" section to display a summary of financial factors for various company categories.

Click on any category to see the figures for individual companies. You may want to get a cup of coffee at this point because the download takes some time. Once downloaded, you can scroll through the list to locate a specific company.

Partners
Most biotech products sound promising. However, it’s difficult to know if there are better competing products in the pipeline, and the size of the potential market even if the product is successful.

Small biotech companies usually form partnerships with large pharmaceutical firms to market their products. The existence of these partnerships means these in-the-know companies think highly enough of the product’s prospects to take on the marketing.

You can find a list of marketing and research partnerships on the Recap site by selecting Alliances, and then typing the company name into the "Database Quick Search" entry box.

Clinical Trials Status & Other News
Biospace.com (www.biospace.com) is a good place to keep up with biotech news, especially the status of clinical trials.
published 4/9/00

Questions or comments about this site:

Winning Investing  •  411 Palmer Avenue • Aptos, CA 95003

(800) 276-7721 • (831) 685-1932

(Aptos is 'the beach' for Silicon Valley)