Biotech Chronicles #1: The Survivor Business Model

Its the Business Concept and Science-Not the Numbers

Think about it. Why do investors keep coming back to biotech? Why do VC’s, hedge funds and traders like biotech? One reason is that it is not just dependent on fundamentals and financial metrics. Biotech thrives on medical news, scientific breakthroughs, potential cures for serious diseases and the food chain of M&A. The market exists because of the need for future products and current developmental projects from large pharma to tiny biotechs. The fuel for the trade is the NIH budget, university funding, R&D budgets and VC funding. Themes and technology drive investments: monoclonal antibodies, RNAi, genomics, personalized medicine, targeted therapy,etc. etc.

The stocks are volatile because of the clinical and deal news. Creative management teams who know the science,intellectual property framework and sources of capital can stay alive and thrive if their timing is right for the market window. Companies morph within months.Bankruptcies are rare. Clinical Data(CLDA $30) which was recently sold for about $1.2B to Forest Labs had a market cap of 1/5 that value just two years ago.

Here is a short list of survivor biotechs who have passed the test of time in bull and bear markets(This does not mean that they are buys now).

Two-Repligen and Xoma- are from the ’86 vintage IPO, a 25 year anniversary. Yes if you held over the long term you lost money. But you had many trading opportunities long and short particularly from 1994-2002. That is why hedge funds who know the sector love it. XOMA surged 300% from Dec 2010 to January 2011 a 3 week period. At the peak of the 2000 bubble market Repligen stock was $16.67 and is now at $3.36.

Human Genome Sciences (HGSI $29) is soaring today up 13% on the anticipated news of the FDA approval of its Lupus drug Benlysta (belimumab). Benlysta is a bioengineered monoclonal antibody thatblocks a protein called BLys or B-Lymphocyte stimulator which is elevated in Lupus. HGSI was a $1 (yes one dollar) stock just two years ago in March of 2009 and has appreciated 30X since that time. The accumulated deficit for Human Genome is $2.4B since inception and the market cap 18 years later is now $5.5B or about twice the investment not including R&D partnerships. Now that is volatility.

Ligand pursues an acquisition strategy and has a pipeline of 30 programs and an existing royalty stream from six products:

San Diego’s Ligand Takes Advantage of the Great Recession to Build New Drug Pipeline | Xconomy

Company Ticker Price $ MarkCap IPO date Cash Revs Retained
Ann. Earn
HumanGenom HGSI 29.15 $5.5B Dec’93 `$437 ~$157M $(2.4B)
Ligand LGND 10.73 $211M Dec’94 ~$30M ~$25M $(691M)
Repligen RGEN 3.35 $103M May’86 ~$50M ~28M $(116M)
Xoma XOMA 5 $110M June’86 ~$17M ~98M $(822M)

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