it has a “revolutionary new cancer cure” or even glib talk like it has “a tiger by the tail” with some new drug candidate, then I know it’s not a serious company. Sometimes you’ll hear a company say it wants to be the next Genentech or the new flavor of the moment, without any solid data to back up such a grandiose assertion. Or maybe they’ll set unrealistically aggressive timelines for reaching milestones, and then hope nobody notices when they miss the goal by a year. Some will always brag that a Big Pharma partnership is right around the corner, but they never get around the corner. The biotech scrap heap is littered with companies that overpromised and underdelivered. The best ones are humble, and do what they say they’re going to do. When they nail a Phase II, placebo-controlled, randomized clinical trial they will describe it, appropriately, as an encouraging development that they must confirm in a Phase III. Sadly, some companies prefer to take shortcuts, and indulge in excessive hype. Smart investors see through this fog pretty easily. “It is an incredibly bad sign if there are multiple YouTube videos of a CEO participating in paid, mock interviews. Things like that are disingenuous and reek of desperation, so it is impossible to consider companies that resort to them for any type of serious investment money,” says Brad Loncar, an individual biotech investor in Lenexa, KS.
Too much yakking about the problem, not enough about the solution: If a company spends a lot of time talking in its presentations about what a big problem breast cancer is, and not much time talking about hard data to support its allegedly important new treatment, then they are wasting everyone’s time.
Insider selling: If a CEO is selling large blocks of shares in his or her own company, particularly after a big run-up in price, it’s usually a good indicator that investors should do the same. Remember, management knows a lot more about the company’s operations and prospects than outsiders do.
Family members in key management roles: There are companies out there led by siblings, or husband-and-wife teams, or with boards packed with relatives or cronies. Are we really supposed to believe these people are the best in the world for tackling the hardest challenges in biomedicine? “These aren’t family businesses,” Henney said in his 2009 talk. “If you see a board dominated by siblings, or a couple of siblings in key management roles, I’d run, not walk.”
Does the company have enough money to create value? Many biotech companies are undercapitalized. They don’t have enough money to achieve their goals. If a company only has $10 million to run a single Phase II trial, then no one should be surprised when it cuts corners in trial design with a study that doesn’t have enough patients, or an adequate control group to provide a definitive answer on whether its drug works. Often, you’ll see a company run one of these shoestring trials, make unsupportable, desperate claims about positive results, and use that to try to raise more money. It’s better to raise enough money from the start to run a well-designed trial that yields a clear answer. Essentially, each experiment needs to help build a strong body of evidence that creates value, and reduces risk. Anything less is a waste that will come back to haunt a company. “If a venture syndicate advances a clinical program through Phase II but can’t credibly fund the Phase III, strategics [Big Pharma companies] will use that against the company in partnering or M&A negotiations,” said Ashley Dombkowski, a managing director with San Francisco-based Bay City Capital.
Can this crew demonstrate real value to payers, or are they living in the ‘90s? I’m amazed by how many biotech executives seem to cling to strategies of the past. They seem to think all they need to do is win FDA approval of a new drug, set the price wherever they want, and count the money. These companies ignore that the Affordable Care Act is established law in the U.S., and skyrocketing healthcare costs are putting tremendous pressure on insurers to save money wherever they can. Biotech companies need to figure out how to prove their products are not just effective, but cost-effective. The healthcare world has changed, and biotech companies need to change with it. “Insured patients were once largely shielded from health care costs,” Dombkowski says. “But health insurance re-design is leading to higher co-payments and more patients with higher deductibles. In an increasingly consumer-driven system, price transparency for patients and caregivers will be ubiquitous, outcomes will be measured with unforgiving precision, and comparative assessments of value will be the rule not the exception. The company’s product better be able to stand up to that kind of scrutiny. Better yet, it should benefit from that kind of scrutiny by so obviously outperforming legacy interventions.”
Companies that can’t explain how they’ll make money for investors: Sometimes people get so wrapped up in the science and clinical trial plans, that they lose sight of an ability to explain how this will provide a tangible return on investment. “If a timeline to commercialization is not evident, you might as well be donating your money to an expensive science project,” says Loncar. “While there isn’t necessarily anything wrong with that, you shouldn’t confuse a good cause with a good investment.”
Lack of focus: Biotech companies, especially in their early days, often get drunk on their own hype, thinking anything is possible, and they can cure just about every disease under the sun with their new technology. They can’t. Is this a company with eight new drug candidates in Phase II? That’s OK if you’re Amgen or Genentech, but does a little company really think they can execute on that many programs? There’s only so much time and money, and by the way, biology is still incredibly mysterious. No company can do everything. Focus is a must. “While there are times when multiple programs are a sign of strength—I think of great companies like Moderna, Adimab, etc.—there are also plenty of sad stories about companies that parallel processed so many activities or programs that they blew through capital without advancing anything well,” Dombkowski says.
Focus on the wrong thing: If a company is concentrating on some new innovation for pancreatic cancer or Duchenne Muscular Dystrophy, that’s one thing. Those are deadly and debilitating diseases crying out for innovative new therapies. If the company is
