I recently made a post relating to what makes a Biotech Company worth Investing in and I wanted to make a follow-up post on how I conduct my research into a Biotech. To get yourself up to speed I would recommend checking out the first post here – What Biotech Company is Worth Investing In? That post provides my experiences as an investor in a few biotech companies and I review some failures and lessons learned along the way. All are very important and will be further elaborated on throughout this post!
In this post, we are going to review the process I use when looking for Biotech companies and were to find specific information about them. I will go over what websites/tactics I use to find biotechs, where to find company presentations, data releases, how to navigate sec.gov, and a few other tricks to find solid biotech investments.
Remember there are 1000s of biotech companies out there attempting to better aid patients so finding winners takes time and lots of due diligence. There is lots of reading and searching the web for as much information as possible. This skill will take years to develop and will never fully be mastered.
Finding your Biotech
The first step is to find Biotechs. This is a lot easier said than done since there are so many and it’s hard to filter through all of them. So, let us go over some techniques I use to narrow the playing field.
I have used this website FDA Calendar which shows the next 150 up-and-coming events within the Biotech world – If you decide to pay for a subscription you will get access to the next 800 up-and-coming events. This website is cool and gives good insight into what the company’s drug is, what stage it is currently in, and its timeline in terms of releasing data or working with the FDA. I have taken a snippet of the website below.
This is a good filter for you as you can filter for companies around the phase 2 area. I would then look at the market caps of the corporations. For example, AXSM’s current market cap (MC) is around $1.5B. For me, at this current MC, I would pass on AXSM. I look for biotechs below the $300MM range. This gives the company a good chance to have a 3-4x return and reach larger MCs. ABIO has an MC of about $35M. This is very small. Something I am more likely to look into.
Another strategy to find biotechs is to follow Biotech Funds like Franklin Templeton, Blackrock, Polar Capital, Medical BioHealth, and RIM Global Bioscience. Some of these funds were run by the following three people in 2020 and were considered the top three biotech managers, David Pinniger, Dr. Michael Fischer, and Mario Linimeier.
Lastly, another cool site to explore is ClinicalTrials.gov. I am new to this site but I think it will become very useful to me as it gives live updates for trial enrollment. This is important when biotechs are trying to enroll several 100 patients in their study. This process can take longer and this website can keep an investor updated on its progress.
So now you find a couple of biotech and it is time to go to their website and look into them a little deeper. You are looking to narrow your search even further. You do not want to be invested in multiple biotechs. One or two companies max. That one biotech should check off all the green flags I have listed below!
For educational purposes, we are going to look at a company that I have researched called Cassava Sciences and 4D Pharma as examples throughout my green flags.
Once you find a biotech of interest from the FDA calendar your first step is to look at their financial state to determine their cash position. This should only take 10-15 minutes and will determine if you should move into the science or find another biotech company.
Use sec.gov. Here is the link to Cassava Sciences SEC. Here you want to read the 10-K (annual reports) and 10-Q (quarterly reports). You can look at its total assets to see their cash position and then look at the cash flows to see how much cash they burn over the year. Look for refinancing events or up-and-coming financing events like a Shelf-Registration.
Here is a snippet out of their most recent 10-K. In the top image you can understand how much cash they have available – $266M as of December 31, 2021. The second image shows the Income statement which tells you how much cash they burn per year – $32M per year as of December 31, 2021.
Using our skills, if they burn $32M a year and have $266M on hand then they could live for over 8 years without needing to raise capital. This is very very good. Even in 2020 with $94MM cash and $6MM in expenses Cassava is very well funded.
Science & Data
After you determine the company’s cash position is healthy or if they will need to refinance and you are OKAY with their position, you can move on to the corporate presentations and presentations on data releases. All biotechs will post their recordings and presentations on their websites for you to review. So you can see their whole history and get a strong grasp of what is going on and what is to come.
Here is a link to Cassava’s most recent corporate presentation. This is the first thing I read, it will tell you exactly who they are, what they are trying to achieve, and what trials they are conducting. They will show some general data and provide future outlooks of the trials with their next steps.
I also always want to look at the company pipeline. 4D pharms pipeline is depicted below. Most biotechs will have similar charts like this on their website you just have to dig around and find it.
When reviewing company presentations I noticed 4D Pharma has good data in their Phase I/II Asthma trial which I have depicted below. They will lay out responses from patients compared to the placebo (placebo is the control group that did not get any medication). The data below shows that the patients getting 4D’s asthma treatment are feeling significantly better than the placebo. This is generally good.
Along with trying to treat asthma 4D is also looking to treat IBS which is an irritable bowel syndrome. The data here also shows that 4D treatment is working and safe for the patient using it.
Can you calculate what the downside of the stock is if the company fails? Looking at Cassava Sciences 10-K as referenced above in the previous section will also tell you the number of shares available. You can use this to calculate what the share price would drop if the treatments failed.
You must not forget to account for outstanding options, warrants, and stock rights when calculating your risk, in this case, Cassava has 2.8M outstanding shares for options, warrants, and stock rights. So, we are looking at about 43MM shares and $266MM cash positions. $266MM divided by 43MM Shares = $6.18 per share is what the stock price would settle at if the biotech failed its trials. Currently, Cassava is trading at around $40.23. This is a huge spread for your risk. You are risking about $34 per share or 85% of your position. That is huge and not something I recommend.
The reward side is all based upon the drug and disease. Different drugs will warrant different potential market caps within the biotech industry. The sector for irritable bowel syndrome (IBS) can be between $500MM to $1B. The asthma sector can roughly be $1 to $2B. Oncology can be over $2B. And something like Alzheimer’s drug can be over $10B market sector.
This will help you calculate your reward. With a stock like ABIO above having a $34MM MC if the predicted market sector is worth $900MM then that stock price of $2.40 has the possibility of having a 30x return or trading at $60-$70. Yes, this is possible in the Biotech world but it is not like putting a quarter in a machine and you get a gumball, do not expect this return very often, maybe only once in a lifetime.
Who owns the Stock?
Usually, there will be a section on the company’s website where you can look at who within the company is buying stock. You can look at Cassava Company Holdings. Click on Form-4 and it will give you names, just cross-reference them with the board of directors and you can see who is internally buying the stock! The more they buy the better!
Now don’t kill yourself trying to fully research 5-10 biotech’s a day. I would say start slow and do 1-2 in-depth searches every couple of days and start watching biotechs that are going through data releases and earnings reports. Even though you don’t have a position you can still learn plenty from watching the stock price and investors react to the news. Twitter is a great source to hear the public opinion on the stock. Just search $SAVA in the Twitter search bar and you’ll get lots of info from the public on the stock.
Disclaimer: Do not take my advice on buying stocks. This post is simply about a strategy for finding biotechs to invest in. Thanks.
Categories: Financial Advice