Investing in Biotechnology
September 9, 2004

"The most powerful force in the universe is compound interest"
 Albert Einstein quotes

Readings:

1. The Motley Fool: A "Foolish" Checklist for Biotech Investing NOTE: A THREE part article!!!! (i.e.: read all three parts)
2. The Motley Fool: Biotech Investing Do's and Don'ts
3. The Motley Fool: We Buy, Sell and Praise September 10, 2002 Ouch!
4. The Motley Fool: Why I Won't Invest in Biotech, By Tim Beyers August 27, 2004: Summary: "Ignorance kills investment returns."

NOTE: The beginning part of the notes below (Part I) is mostly background - we will talk about it only briefly in class, concentrating mostly on Parts II and III. We will also be going to the computer cluster, SL-070-D, about half way through class, to get started on our Stock Project. Important: Make sure you are a Registered Fool before coming to class!

I. The Basics of Investing...courtesy of The Motley Fool (we will go over this in class briefly; no homework required, but I recommend reading these articles!)

Step 1: Before you invest.....

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 (and all those banks thank you very much for all that interest you are paying them!). Too late? Struggling under those high balances and interest rates? Check out: "9 Ways to Pay it Back"

b) While you are paying it back, think about each decision that uses your money. It sounds like a cliche, especially when you are a starving graduate student who can only afford rice and beans and 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 Cable TV? An SUV? 'Unlimited AnyTime Minutes'? A steamy and delicious Starbuck's every day? [Another great book: Simplify your Life, by Elaine St. James. Almost as thrilling as Her-2.]

c) Set a goal: 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! A payroll deduction is a painless way to save money (almost) without noticing it! Build up a cushion of short-term savings while you are deciding where to go next! [OK, mom,... now you know why this is called a lecture!]

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!

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 with . 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.

Step 3: Money - now that you have it, where do you put it? Direct from Investing Basics

CAUTION: All starving grad students are strongly advised to regard with caution any investment guidelines that come from a Biology Professor who not so long ago WAS a starving graduate student who had to walk miles in the snow each way to school, and who currently drives an '89 Hatchback Mazda with 150,000 miles on it.....

Most investors agree that the most effective investment strategy is to diversify investments across broad asset classes rather than specific investments that may or may not turn out to be winners.

However, where do you put your money? 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. 5% is what you might get from an individual retirement account (IRA) certificate of deposit (CD), 10% is a little less than the historical average stock market return, and 15% or more is what you might get if you use one of the investing strategies described in Investing Basics. Note from K. Marrs: Is is possible to get 20% these days? Oh mais oui... We will take a look at last year's Biotech Stock Portfolios...if only we had invested REAL money!! Fool

Growing At....

Age	5%	10%	15%	20%
20	$ 100	$ 100	$ 100	$ 100
25	$ 128	$ 161	$ 201	$ 249
30	$ 163	$ 259	$ 405	$ 619
35	$ 208	$ 418	$ 814	$ 1,541
40	$ 339	$ 1,083	$ 3,292	$ 9,540
50	$ 552	$ 2,810	$ 13,318	$ 59,067
60	$ 899	$ 7,298	$ 53,877	$ 365,726
70	$ 1,147	$$ 11,739	$$ 108,366	$$$ 910,044

The Rule of 72: The rule says that 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!

The 9 deadly sins of investing - Direct from Investing Basics.... Don't let these happen to you!!!

1. Doing Nothing.	4. Investing for the Short Term.	7. Turning Down Free Money (employer-matched savings programs).
2. Starting Late.	5. Playing It Safe.	8. Trading In and Out of the Market.
3. Investing Before Paying Down Credit Card Debt.	6. Playing It Scary.	9. Viewing Collectibles as Investments.

Want to read more? 13 steps to Investing Foolishly

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!

I don't know anything about the stock market! Shouldn't I put money in the hands of paid professionals who know how to invest my money in mutual funds? While Mutual Funds are very popular - your money is pooled into stocks or bonds that a paid Investment Analyst deems worthwhile - the responsibility of managing the fund is left to the analyst. Unfortunately, in most cases (8 out of 10) 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 (handout): 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: "Risk. How comfortable will you be if you invest in something in which the price changes every day? There are various degrees of risk across the investment spectrum, from government bonds, which are considered risk-free as they are guaranteed by the government, to commodities and options, where you can and often do lose all of your money." 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. A full-service broker will advise you in making decisions; a discount broker just transacts the stock purchase or trade. Full-service brokers are paid on commission - not based on how much you earn, but on how often you trade. Discount brokers make money by doing business in volume, competing on prices and services. You place an order every time you buy, sell, or trade, and can specify when and at what price you will sell. Daytrading: We're not even going there.

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!

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.

For Rational Stock Analysis of a Biotech company: From The Basics of Biotech Investing

Why are we talking about investing anyway in a Biotech class? Because Biotech companies are businesses, and in order for businesses to grow, it needs to both make good products AS WELL AS generate enthusiasm from investors willing to put more money into the company (and reap the rewards - a return on their investment)!

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. The following text from this section comes straight from the Fool article above, essentially "Foolish Financial Analysis" of a Biotech company:

"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 a lot of money, or the facilitles to get their product to the market. Big Pharma usually has money, plus manufacturing facilities, worldwide sales and marketing already in place - and is always looking for new products and technologies to bolster their pipelines. Generally, a partnership involves the major drug company funding or taking ownership of the cost of clinical trials. They may also assume manufacturing, marketing, and sales of the drug. Once on the market, the small company receives royalties on the sales, usually ranging from 5-10%. Often, an agreement with a major drug manufacturer is seen as validation of the small company's technology (whether this turms out to be true is another matter).

5. Research & development spending - R&D spending is an indicator (an imperfect one) 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. This is a good sign and usually indicates increasing momentum. The second is decreasing or flat R&D spending, which can indicate that the company is running short on cash or is not pursuing new research projects.

6. Enough cash to fund operations for two years - critical to second and third tier companies is having enough cash to fund operations and pay for R&D activities until the $$$ starts pouring in. Look for (1) the amount of cash the company has by looking at the latest published balance sheet (usually under Investor Relations) and (2) how fast the company is "burning" that cash by reviewing the cash flows on the latest quarterly report, you can see whether 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.

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))

Thanks, Motley Fool, for all the great investment advice!

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 scientific development, business decision, or new partnership.

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."... While you would not want to base your investing decision on the company's press releases, they are a useful piece of informaiton from which to do further research into your company.

III. A few misc comments about "Young" Biotech Companies.....

1. Biotech Startups: Say you and your team DID want to start a biotech company. How do you get the money to start up the business? The initial money may come from the founders putting in as much of their personal savings as they can, getting a bank loan to cover the amount needed, or getting a round or two of funding, called Venture Capital (VC) from private investors. A VC firm will require a business plan - what you plan to do, how you expect to become profitable, etc - before they invest some of their fund. They may limit their funding to a number of years, anticipating that the startup will either go public (see IPO, below) or be purchased by a bigger company within a certain time frame, causing a cash influx in either case. This allows the VC firm to 'liquidate' and cash out (based on a valuation of the company) - hopefully having made a good ROI in the meantime. The VC firm may also have stock in the company, and thus some say in the direction of the company.

2. The ABCs of IPOs - Going Public. The Initial Public Offering is the first sale of stock to the public. 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 provide an annual report to stockholders, and the public, about its operations. 2004's big IPO, of course, was Google and their unusual "Dutch Auction" method! Google raised $1.67 billion on their IPO August 19, 2004, making billionaires out of founders Sergey Brin and Larry Page, who started Google six years ago as starving grad students as part of their Team Project at Stanford in 1998 (Stanford netted about $16 M on the deal)!!! Google today searches over 4,285,199,774 web pages in 1-0.1 seconds! Like wow!

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

Project: How to be a Biotech Stock Billionaire