Huge fortunes are won and lost in the world of biotech nearly every week. For those new to this world, it can appear both alluring and scary. Biotech investing for beginners isn’t for the fainthearted, but the potential rewards are great. Here are three important things to keep in mind if you’re contemplating trying out the clinical-stage biotech waters.
Throw revenue growth, earnings per share, valuation multiples, and pretty much every other financial figure out the window if you’re looking to invest in an up-and-coming biotech. These companies typically won’t have any revenue or earnings of significance.
For example, Keryx Biopharmaceuticals (NASDAQ:KERX) reported no revenue for 2012. Not a dime. The company lost $22.7 million last year and even more the year before that. However, those financial results really aren’t important at this point.
Biotech investors should focus on cash, though — in particular, the burn rate for that cash. A company can have a promising product, but that promise fizzles without enough cash to complete clinical trials.
During the first quarter of 2013, Keryx Biopharmaceuticals (NASDAQ:KERX) showed a burn rate of nearly $2.2 million. This rate is calculated by adding capital expenditures to the company’s operating cash flow. At the end of March, Keryx Biopharmaceuticals (NASDAQ:KERX) showed cash and cash equivalents of more than $87 million thanks largely to a secondary stock offering earlier this year. This means that the company is in solid shape from a cash standpoint. That’s not always the case with biotechs.
2. Regulatory roulette
Another key investing concept for beginners to understand is that biotechs live or die on regulatory decisions. The road to approval for a drug is a long and winding one.
Dynavax Technologies Corporation (NASDAQ:DVAX) is a good case in point. The company’s Heplisav hepatitis B vaccine looked good in clinical trials when compared to the leading vaccine on the market. Dynavax Technologies Corporation (NASDAQ:DVAX) thought that the safety profile for Heplisav also compared favorably. The Food and Drug Administration even told the company that it could expand its Biologic License Application, or BLA, to include a wider age range of adults than originally planned.
All of that meant nothing, though, when an FDA advisory committee voted not to recommend Heplisav for approval because of safety concerns. It meant even less several months later when the FDA heeded that recommendation and didn’t approve the vaccine. Dynavax Technologies Corporation (NASDAQ:DVAX) shares plunged more than 60% from previous highs.
Sometimes, even the hint of an unfavorable regulatory decision can impact a biotech stock. Sarepta Therapeutics Inc (NASDAQ:SRPT) shares lost more than 25% of their value in April. There wasn’t an outright adverse FDA decision in this case. Instead, the FDA requested additional information related to a potential accelerated approval for Duchenne muscular dystrophy drug eteplirsen.
