Let’s think about an industry where the companies have a product development time of 7-10 years, at a cost of a minimum of $100M (I’m not talking about the famous Tufts numbers here, I’m assuming you’re lucky and that one compound makes it through the clinic unscathed), and at the end of it all is at the mercy of unelected bureaucrats who can change the goalposts at any time. Sounds like something you want to invest in??
If so, then I’ll start by laying out David’s First Biotech Investing Commandment.
I. Thou shall not make money in biotech long-term being long-only. Thou shall short biotech stocks to have any chance at positive returns
Biotech is a lousy business. Most companies fail to get anything approved and bounce around on hopes and dreams until they finally turn into a biotech “zombie”–you know, those dinky stocks trading around cash, always getting de-listed…
Therefore, it is a rich field for shorting. Instead of buying low and selling high, why not sell high and buy (back) low?
Sub-commandments for shorting, or The First Commandment’s, um, fine print?
Ia) Thou shall identify biotech short candidates by dividing them into three buckets, and these buckets shall number three (sorry, Monty Python on):
Ii) Likely clinical failures due to disease area. Some diseases have just proven nigh-to-impossible to treat: Alzheimers, sepsis, obesity etc.
Iii) Likely clinical failures due to trial design. Some companies run clinical trials that just have no chance of showing a definitive result. This can be due to statistics, endpoints or other problems.
Iiii) Commercial failures. Sometimes companies just can’t sell enough of what they fought so hard to get approved. This is probably the smallest category for biotech shorting, but does exist…
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