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Investing in Biotechnology & Pharmaceutical Companies

Investing is a challenging endeavor, and an activity that lacks certainty. Increasing the certainty of your investments, will increase your confidence in making investment decisions. In this article, I want to focus on two specific industries within equity investing. We can hone in and drill into the industries of pharma and biotech.

I'd like to discuss ways that the average investor can think about the investments they make into biotech and pharma. There are several pitfalls that can take an already uncertain equity investment, and make it far more uncertain by not recognizing a few common pitfalls. The following list of items is not meant to be a complete list, and the list of pitfalls applies to both pharma and biotech companies. This article is not about how the market may value a healthcare investment, it's about additional considerations that may lead to the long-term success of a company in one of these industries.

  1. Size does Matter: A large biotech/pharma is typically paying a healthy dividend. Large drug companies also typically have multiple compounds that have received marketing approval from the FDA. The factor of having multiple compounds alone limits the risk of investing in this space. These items should translate into less downside risk for the company.

  2. Partnerships do Matter: Many large pharma companies have decreased their in-house R&D departments in favor of partnering or acquiring smaller companies with promising compounds. An acquirer can shave years off the approval process by buying a drug that is far along in the FDA approval process. The FDA approval process usually spans multiple years and can cost more than a billion dollars.

  3. Phase 1, Phase 2, Phase 3....YOUR OUT IN: Just as in a baseball at-bat, there are three major stages before a prospective drug gets into the hands of patients. These are called the phases of the FDA approval process. Typically, the phases will give both the company and the FDA clarity into the viability of a drug and whether it will both be efficacious and safe for patients.

  4. Multiple Approved Indications: First, let's understand what is an approved indication. An approved indication represents a specific FDA marketing approval for a certain drug and for a specific treatment. Once a company has one approved indication for a drug, they often will work to get an approval for a second indication/treatment for the same compound/drug. Having multiple approved indications is a significant milestone that changes the risk profile for the equity investor. You will want to ensure that you understand the compounds that are both in development and on the market before investing into this space.

  5. Multiple Approved Compounds: An equally important indicator is how many approved compounds/drugs does the firm have. Having multiple approved compounds means that different drugs have been approved for marketing by the FDA. This will provide diversification for the company and limit the risk of having one compound either have a safety issue, or face the threat of a new competitor entering the market.

  6. The Shangri La: Multiple approved compounds/drugs with multiple indications/treatments for each drug.

  7. Safety and Tolerability: How well are the company's drugs tolerated by patients? Also, what are the side effects or potential side effects? (Such as secondary primary malignancies) Having a very well tolerated drug with no black box warning labels, will improve the success of the drug.

  8. In-House R&D VS. Limited Internal R&D: I personally like to see that the companies I invest in have a burgeoning R&D department. The reason I like this, is that when the development is internal, that success may have a better chance of being repeated by the same professionals. If the drug was discovered by an outside team, future compounds typically cannot be discovered by that same team. This isn't a hard and fast rule, and many successful companies acquire all their compounds or drugs. So, at the very least, this is a factor that you should be aware of when investing into the company.

  9. Founders at work VS. Founders on vacation: First, you'll want to ensure that the investment is into a company that is experiencing some amount of success. I feel that having the team in place that orchestrated the original success is quite important. Sometimes, this team isn't necessarily the founders, but try to get an understanding about how the current management has contributed to the success of the company.

  10. PPP - NO! not that PPP: NO! I'm not talking about purchasing power parity(PPP). I'm referring to "Potential Patient Population". How many potential patients are candidates for the drugs in development, and what are the demographic, geographic, and social implications of the drug? Small patient populations can be deemed as "Orphan Drugs" and these compounds can receive certain special benefits afforded by the FDA to speed the approval process and limit the time to market. Essentially, the FDA wants to get breakthrough therapies into the hands of patients quickly.

  11. Drug Pricing & Social Implications: The annual cost of many treatments is north of $300,000. Some treatments allow patients to live a longer life, while others improve quality of life and require taking the drug for the remainder of a patient's life. Some HIV treatments are effectively lifesaving, while not providing a complete cure for the patient. Some patients live for more than two decades on HIV medicine, and real world patient examples are still underway. A famous basketball player, Earvin "Magic" Johnson Jr., has lived with HIV for over 25 years without signs of disease progression.

While this list is not complete, it provides a good starting point and a few interesting challenges to consider before you make an investment into a biotech or pharma company. Investing into biotech and pharma can be both exciting and rewarding if you do your homework to ensure that you understand both the risks and opportunities.

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