ABOUT

*Investing in publicly traded biotech companies involves extreme risk and loss of full capital. My personal opinions and experiences are presented here and do not constitute investment advice*

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​     My thesis demands that a new approach be considered when investing in biotech companies. Traditionally, biotech stocks are followed in much the same pattern as public companies in other sectors. Analysts are assigned to follow a company continuously and provide information related to fundamental metrics, technical metrics, market trends, quarterly reports, ratings, and opinions. Most stocks in other sectors can be efficiently valued due to large trading volumes, predictable revenues, and anticipated quarterly results. Hence, large percentage movements in these stock prices are rare and are usually due to positive/negative disruptions or black swan events. When biotech stocks are viewed through this traditional lens their exaggerated price movements seem as though they are too risky to invest in...either 100% gains to the upside or loss of entire capital to the downside. This risk pushes many investors to think of biotech stocks as lotto tickets where the time of the drawing is unpredictable and the results cannot be anticipated.

 

     In order to make biotech stocks investable, I consider a novel approach that requires viewing biotech companies through an untraditional lens. Of utmost importance is determining if a biotech stock is investable. A biotech stock MUST offer put options in order to be investable. Pairs trading is not optional in biotech investing thus the put options against the individual stock is necessary. Next is the necessity to determine the timing of the catalyst event. I only consider topline trial result releases as catalyst events. Other so called catalyst events (NDAs, INDs, PDUFA, etc.) do not usually produce the price change magnitude necessary to make the biotech trade investable. This next step is probably the most significant deviation from tradition lens of company analysis. I create groups of biotech companies arranged by catalyst event timing (1Q25, 2Q25, 3Q25, 4Q25, etc.) rather than following a company for months or years through the drug development process and trying to invest when an analyst gives a buy rating or explains that the company is a good value. I am only interested in a company until the result of its nearest catalyst event. Immediately after the event the trade is closed save a small portion on the side of the trade that remains in deep value. Even with positive results, the company is not "followed" forward but simply researched for its next catalyst event and no further positions are added until the timing of that event nears.

 

     Put options allow a biotech stock to be investable by managing risk. The price of the put option with consideration to its strike price determine how many shares of stock or call options can be purchased in order to create a trade where the risk approaches zero. This is why I need to target biotech companies with anticipated exaggerated price movement on their catalyst date. Small price movements will sink the trade as the expensive options' prices are not justified. I am looking for stock price movements of 50%-75% to the downside and 75%-100% to the upside. Even though I have a proprietary method for calculating these movements, I can say the following metrics factor into my calculations: trial phase, trial value, market cap, indication, FIC/BIC, pipeline, technology, management, company location, number of employees, compound history, shares outstanding, cash burn, short interest, etc. Notice that I do not consider earnings, PE ratios, price/book, dividends, forward guidance, moving averages, or any sort of technical analysis. That is the traditional lens that cannot see how to truly value biotech companies and create investing positions that intend to minimize risk while still allowing upside capture.    

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