Download Investing in Biotech - Cy Lynch

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Investing In Biotech:
High Risk Or High Reward?
Cy Lynch, Manifest Investing
BETTERINVESTING NATIONAL CONVENTION
Disclaimer
•
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•
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Biotech Companies Defined
• Generally businesses applying
technologies (genetic engineering,
recombinant DNA techniques and the
like) to:
– Identify targets for drug development
– Transform biological systems into useful
processes and products
• Many are small companies with no
current product, but hoping to come up
with a blockbuster
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Challenges Of Investing In
Biotech
• Requires knowledge of drug approval
process and perhaps specialized
knowledge of industry
• Can be speculative, not unlike the
lottery (especially with small
companies):
– Great reward if you’re lucky or “right”
– Great risk of failure – you could lose
it all!
BETTERINVESTING NATIONAL CONVENTION
“Tiers” Of Biotech Companies
1. Established and large with one or
more successful products on the
market
2. Those close to profitability with
growing sales from drugs on the
market or potential big sellers in
late-stage clinical trials
3. The rest, just having products still
in the discovery or clinical stages
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Qualities Of Investment-Worthy Biotechs
1.
2.
3.
4.
5.
6.
7.
8.
Successful products on the market
A deep product pipeline with late-stage
candidates
Drugs and candidates that target large or
underserved markets
Partnerships & marketing agreements with
blue-chip drug companies
Research & development spending
Enough cash to fund operations for at least
two years
Experienced management
Favorable prospects and value based on your
study
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Pharmaceutical Approval
Process
•
•
•
•
•
Pre-Clinical – 4 to 5 years
Phase I – 18 months
Phase II – 2 years
Phase III – 3 to 4 years
Marketing approval by the FDA – 1
to 2 years
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Pre-Clinical Stage
• Typically involves years of
testing on animals and human
cells
• Successful results lead to
Investigational New Drug
(IND) application to FDA
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Phase I Clinical Testing
• Typically takes several months
• Involves testing in small number
(20-100) of healthy humans
• Primary concern is safety
• Also determines how is drug
absorbed, metabolized & excreted
• Must be “reasonably safe”
• About 70% of drugs pass
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Phase II Clinical Testing
• Takes several months to two years
• Most involve “randomized” trials on up
to several hundred people in two
groups:
– Patients receiving experimental drug
– Control group receiving standard
treatment or placebo
• Often “blinded”
• Seeks comparative data on relative
safety and effectiveness of new drug
• About one-third pass first two phases
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Phase III Clinical Testing
• Typically lasts several years
• Expensive, large-scale testing in several
hundred to thousands of patients
– Usually randomized and blinded
• Seeks more thorough understanding of
effectiveness, benefits and range of possible
adverse reactions
• 70-90% of drugs completing Phases I & II
successfully complete this phase
• Company can then request FDA approval for
marketing the drug (New Drug Application
[NDA])
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NDA Submittal To FDA
• Lengthy documentation
• FDA action:
–Approval
–Denial of application
–Sends the company back for
more study or data
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Phase IV Clinical Testing
• Comes after FDA grants NDA and drug
is on the market
• Can be voluntary or required in
conditional approval
• Potential objectives:
– Comparisons with existing drugs
– Monitor long-term effectiveness and
impact on quality of life
– Cost effectiveness relative to other
therapies
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Summary – New Medicines Timeline
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Six “Foolish”
Commandments of Biotech
Investing
Author’s (Brian Lawler, Motley Fool contributor)
disclaimers:
•This isn’t a complete list of Biotech Commandments
•While the bad characteristics mentioned aren’t
necessarily an investment time bomb waiting to explode,
they indicate more risk than for the average biotech.
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Biotech Commandment I
• Drugs that fail their
primary endpoints in
clinical trials, yet still get
submitted to the FDA [ ],
usually do not get
approved.
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Biotech Commandment II
• Biotech companies located
on Pink Sheets, over-thecounter exchanges or even
the American Stock
Exchange often make bad
investments.
BETTERINVESTING NATIONAL CONVENTION
Biotech Commandment III
• Expect volatility in the
share price of biotech
stocks whose companies
don't have revenues or
approved drugs.
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Biotech Commandment IV
• Drugs formulated to treat
certain types of diseases
have a much harder time
gaining regulatory
approval than do other
drugs.
BETTERINVESTING NATIONAL CONVENTION
Biotech Commandment V
• As a clinical trial's size
and length increase, so
do the complexity and
probability that something
may go wrong.
BETTERINVESTING NATIONAL CONVENTION
Biotech Commandment VI
• Stay away from unproven
technologies. You have
no idea whether the tech
even works in people, let
alone the specific drug
you're investing in.
BETTERINVESTING NATIONAL CONVENTION
Summary
• Biotech can be rewarding but carries high
risk of volatility and capital loss
• All but the most aggressive investor should
concentrate on established, Tier 1 biotech
companies
• When considering Tier 2 companies:
– Acquire knowledge of the bio/chemical nature of
the just approved, or late phase developmental,
drug(s), its potential market and competition
– Understanding of where developmental drugs
are in the approval process
• Avoid the rest (Tier 3) with just “stories” &
dreams
BETTERINVESTING NATIONAL CONVENTION
Sources
• Ashton, Zeke, A Foolish Checklist for Biotech
Investing, June 13, 2000
www.fool.com/research/2000/foolsden000613.htm
• Lawler, Brian, The Commandments of Biotech
Investing, August 28, 2006
http://www.fool.com/investing/highgrowth/2006/08/28/the-commandments-of-biotechinvesting.aspx
• Feuerstein, Adam, Biotech 101: The Road to
FDA Approval, July 5, 2004
www.thestreet.com/story/10169168/1/biotech-101-theroad-to-fda-approval.html
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