Investing in Biotechnology
September 11, 2007
"The most powerful force in the universe is compound interest"
 Albert Einstein

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I. The Basics of Investing...courtesy of The Motley Fool

 

Step 1: Before you invest.....hate to say it, but settle those darn finances!

 

Let's face it. You can't be an investor unless you have some of that lovely green stuff to begin with. Don't expect a lump sum to land in your lap. It's going to come from one place - your paycheck. [Exception for some students: The Bank of Mom & Dad. Open 24 / 7. Bonus: Free advice dispensed with every transaction....

 

a) Get Out of Credit Card Debt. Please remember that the money available on a credit card is NOT YOUR MONEY. What you are doing when you use a credit card is spending money you have not yet earned (with interest!). Oh, and a fashion statement, too. Too late? Struggling under those high balances and interest rates? Check out: "9 Ways to Pay it Back"

 

b) Think about each decision that uses your money. You are a starving graduate student who has to walk 10 miles to IUPUI uphill each day...! How could you possibly live on less than you do now??? Suggestions: Do you really need Satellite TV? An iPhone? A steamy and delicious Starbuck's every day? Good article: How Rich Friends make you feel Poor.

Moral: This is your time in life to be poor, wear old jeans (with holes from your Organic Chem lab days), and volunteer for Clinical Trials just to eat free cafeteria food.

 

c) Set a goal and SAVE: Do you have a spare $20 you could put aside every week? If so, one year from today, you will have $1,000 in your savings or to invest! Build up a cushion of short-term savings while you are deciding where to go next!

 

Great article! NY Times 9/1/07:

SHORTCUTS; Save, Save. Don't Splurge on a Piggy Bank, a Tin Can Will Do.

OK - You're working to get out of debt...you have a little money burning a hole in your savings.....You're ready to invest!

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Step 2: Why invest your money ?

Each year, due to inflation, your money is worth a little bit less...maybe only about $0.80 to the dollar you started wit . However, if invested carefully, maybe at the end of that year, your dollar will really be worth $1.10...or more. Fool

 

Patience, time, and The miracle of compound interest: If you're in your early twenties and have an extra $100 (birthday money?!?), you've got the investor's best ally on your side - time!
Get Rich Slowly

 

The Rule of 72: To find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. For example, if you want to know how long it will take to double your money at eight percent interest, 72 / 8 = 9 years! If you have a goal of doubling your money in 5 years, then you'd better be prepared to find an investment vehicle earning ______% / year!

 

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Step 3: Money - now that you have it, where do you put it?

CAUTION: All starving grad students are strongly advised to regard with caution any investment guidelines that come from a Biology Professor ! However...most investors agree = diversify investments across broad asset classes, not just put all your eggs in one basket (ie: stocks)

 

BUT: Where you put your money matters! The table below shows you how a single investment of $100 will grow at various rates of return. A typical bank Savings Account today is ~0.5-2%....). See BankRate.com.
--2% is what you might get from an IRA or CD, (Yikes...awful)
--10% is a little less than the historical average stock market return, and
--15% or more is what you might get from an investment like the Stock Market

(Apple stock has risen 1500% in the past five years...)

Growing At....

"How is the difference of a few percentage points of return so massive after long periods of time? What you are witnessing is the miraculous effect of compounding"

 

Want to read more? 13 steps to Investing Foolishly

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Step 4: How (might) you get returns better than CDs and money markets? The Stock Market

 

Why invest in stocks? Stocks are a way for individuals to own parts of businesses. As the value of the company changes, the value of the share in that company rises and falls. However, people usually don't really invest in stocks just because of the pride of ownership in a company...they invest because they are looking to get a high ROI (return on investment) and make the most of their hard earned money!

 

The Five Biggest Stock Market Myths: Good reading from Investopedia! [HANDOUT]

 

I don't know anything about the stock market! Shouldn't I put money in the hands of educated Mutual Fund professionals who know how to invest my money? Unfortunately, in 8 out of 10 cases, actively managed funds underperform the stock market indices like the S&P 500 due to "The Wisdom of Professional Management". (ie They are no better at picking out winners than anyone else - and you get to pay them for it.) Read: Mr. McCall's Very Bad Day/week/year...

 

Moral, and the Rationale for our Stock Project: You can learn how to invest your own money, and maybe even beat the market! If you are interested, read books, surf reliable webpages, join an investment club - there is no shortage of ways to educate yourself!

 

Determining your investment style

Take the Risk Tolerance Quiz (handout)

 

How do you actually buy stocks? What you need is a stockbroker - a salesperson who works for a brokerage house like Merrill Lynch who you pay to help you carry out your transactions. Check your local bank! A full-service broker will advise you in making decisions; a discount broker just transacts the stock purchase or trade.

 

OR= Recommended with caution: Sharebuilder.com

"Dollar-Based Investing: The stock market for the rest of us" Buy fractional shares at a set $ amounts each each month. $4 / purchase, buy on Tuesdays in Real Time; Thousands of stocks to choose from (This is sort of like what we will do in our stock project!)

 

When to sell: Investment vehicles like bonds "sell themselves" in that when they mature, you make all your principle back (initial investment) plus all the interest generated. However, because stock prices vary widely in the course of a day or week, when you sell can make a large difference in your profit (or LOSSES). "Timing the Market" is a difficult thing for anyone to do! But remember: You don't make (or lose) money on a stock UNTIL YOU SELL IT!

And (snif) just a commemoration to 9/11/01, and the 6-day shutdown of Wall Street that followed.....

 

 

 

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II. The Basics of Biotech Investing: How do "Real Investors" decide to put their money in a company? They go through a process called Rational Stock Analysis. looking at various parameters that provide clues to the overall health of the company.

 

Quoted from The Motley Fool: MARKS OF GREAT COMPANIES
"When you're seeking a company in which to invest, why settle for anything less than a first-class operation? Here are some marks of great companies:

1. Powerful brands. 'Coca-Cola (NYSE: KO), PepsiCo (NYSE: PEP), GE (NYSE: GE), Nokia (NYSE: NOK),   McDonald's (MCD), Ford (NYSE: F), and Disney (NYSE: DIS)'.
2. Significant products or services. 'Firms selling things people really need or really want. Pharmaceuticals = people will buy whether they're flush with funds or strapped for cash. Harley-Davidson (NYSE: HDI) and Starbucks (Nasdaq: SBUX) offer consumers things they love.
3. Strong competitive position. 'Advantages over its peers = brand value, economies of scale (making so much that costs / item are low), and bargaining power. Wal-Mart (NYSE: WMT),is so big that it can boss its suppliers around.'
4. Consistent, reliable earnings, sales, and profit margins. Look for sales and earnings to have increased  steadily over past years, reflecting capable management. See who's wringing the most value out of each dollar of sales. Stock splits
5. Lots of potential. A stellar past isn't enough. Make sure the company has great potential for growth. Is it expanding abroad? Is it coming out with promising new products or services? Are its offerings taking consumers by storm? Is it spending significantly on research and development?

Finally, consider how well you know the company and industry and how much you'd enjoy keeping up with its developments. A firm might have enormous potential, but if reading about it puts you to sleep, it might not be the best addition to your portfolio." ---Thanks, Motley Fool!

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For Rational Stock Analysis of a Biotech company: From The Basics of Biotech Investing (note: Quite old...from 2000!)

 

"Biotech companies worthy of investment should have the following:

1. Successful products on the market: Top tier companies like AMGN, BGEN, DNA have successful products, and good revenues that allow them to invest more money to grow!
   
   
2. A deep product pipeline with late-stage candidates - are there at least 1 or two drugs in Phase III - or submitted as an NDA? Don't underestimate this step - this is where the future company revenues will spring from!
   
   

3. Drugs and candidates that target large or under-served markets - do their drugs (or will their drugs) generate large sales? 1 billion-dollar drug is better than 5 drugs that each generate $1M each. (profit wise, that is).
   
   

4. Partnerships and marketing agreements with Big Pharma - typically, young biotech firms don't have money, or drug production facilities. Big Pharma usually has money, manufacturing facilities, worldwide sales and marketing teams already in place - and ways to bolster their pipelines. Drug company = licen$ing a the biotech company's patents, funding or taking ownership of the cost of clinical trials, assume manufacturing, marketing, and sales of the drug. Once on the market, the small company receives royalties, usually ranging from 5-10% of sales. Often, an agreement with Big Pharma is seen as validation of the small company's technology (whether true or not).
   
   

5. Research & development spending - R&D spending is an indicator of how much a company is investing in its future. There are two trends to look for. The first is increasing R&D expenses year to year = increasing momentum. The second is decreasing or flat R&D spending = running short on cash or is not pursuing new research projects.
   
   

6. Enough cash to fund operations for two years - Lookat the latest published 10Q or annual report for (1) the amount of cash the company has and (2) how fast the company is "burning" that cash = is the company is producing cash or burning cash. If the cash flow is negative, divide cash on hand by the quarterly cash burn to get a rough idea of how long the company can sustain the same "burn rate" before needing additional financing. YIKES! Geron annual report 2006 pg 16; Biotech Zombies
   
   

7. Experienced management - "If you look at a company and you notice that it has a Biotech Legend running the show, you should give it a better than average shot at success." (Note from KM: Don't know if I agree with this one! - they wrote this article "Pre-Enron, Pre-ImClone, etc!!! Don't underestimate the "schmooz potential" of the so-called Biotech Legend...all talk and no action. For a timely story regarding this, read the article We Buy Sell and Praise, Sept 10, 2002)
   
   
8. This is NOT a criterion for investing: the slick Press Release: A press release is a news document a company will send to national and international news wires to get free publicity and let the public know about a new drug approval, business decision, clinical trial success or setback. While the content of a press release usually sounds promising, each press release ends with an important disclaimer:

"Statements made in this news release related to the progress of clinical trials and timing of product development, or that otherwise relate to future periods, are forward-looking statements based on assumptions that may not prove accurate. These may be identified by the use of forward-looking words or phrases such as 'believe,' 'expect,' 'intend,' 'anticipate,' 'should,' 'planned,' 'estimated,' and 'potential,' among others. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict."...

 

DON'T base your investing decision on the company's press releases, but look upon them as useful pieces of information from which to do further research. However, Phase III results and FDA approvals usually DO raise stock prices!
12/29/05 Approval of Cancer Drug Lifts Celgene Stock

III. The ABCs of IPOs: Going Public. The first sale of stock to the public, authorized (sanctioned) by the SEC. It is a way for a company to raise money to grow or continue to fund their operation - and they don't have to get it from borrowing money or VC! The tradeoff: Once a company goes public, it then

• has to share its profit with investors, has to be accountable to shareholders, and
• has to provide an annual report to stockholders, and the public, about its operations.

2004's big IPO, of course, was Google! Google raised $1.67 billion on their famous "Dutch Auction" IPO August 19, 2004 (at $85/share) making instant billionaires out of founders Sergey Brin and Larry Page, who started Google in 1998 as starving grad students as part of their Team Project at Stanford (Stanford netted about $16 M on the deal)!!!

21 Oct 2005: Profit Rises Sevenfold at Google "We were surprised, pleasantly, I might say," Google's chief executive, Eric E. Schmidt

 

22 November 2006 Why will this never be MY Stock Portfolio?!? Google’s Shares Climb Above $500

 

11 Sept 09: Still pretty darn respectable at $472.14

 

 

IV. A few notable pipelines: Would you invest in these companies?

Compare: Amgen (Nasdaq: AMGN) Biogen (Nasdaq: BGEN) Genentech (NYSE: DNA) Novartis (Nasdaq: NVS)

With: Celera (NYSE: CRA) Human Genome Sciences (Nasdaq: HGSI) Millennium (Nasdaq: MLNM) Medimmune (Nasdaq: MEDI)

Are you holding on to a Biotech Zombie?!?!?

Are these 5 the Biotech Dream Stocks??

 

 

V. Now, are you ready to invest $10,000?

Project: How to be a Biotech Stock Billionaire

Objectives: 1. You will not be tested on your knowledge of compound interest, stocks, bonds, or other assets! That material is all there to educate you about investing...hopefully you will be motivated to get a jump start on your financial future $$$$$! 2. The Rule of 72 is a very important concept. Ask Albert Einstein. 3. Please know the characteristics of companies worth your investment dollar, as provided by The Fool. 4. Be able to explain what an IPO is and the benefits and costs to a company that goes public.