October 2020 is finally over! It has been a difficult month – every day, Dow Jones or S&P500 dropped 2-3%.
After leaving my fund, I am focused on managing my own capital with 100% net LONG exposure (but also with no leverage, so 100% gross exposure as well). This means I lost money almost EVERYDAY for the past couple of weeks.
My biotechnology portfolio also has what you would call “some random names” – small to mid capitalization biotech companies that are not generally well-known or liquid – so the macro is doing what it always does (random moves) and the random moves are further exacerbated in normally wicked volatilities that are generally intrinsic to stocks in my biotech portfolio.
However, having lived through the massive drawdowns in late 2018 really gave me a lot of confidence – at least enough for me to buy opportunistically in some names with strong conviction.
End of 2018 was really really bad – macro was bad, but stocks that I really liked and had as top positions in the book dropped by 5% on random days for consecutive days with no clear news. There is a anonymous Bloomberg group chat among buyside / institutional people and they would sometimes specifically talk about specific funds experiencing severe redemptions and some people would highlight their large positions. Sadly, those stocks would soon trade a lot as some people would short / sell their positions, hoping to get ahead of forced sale by whatever fund that is undergoing distress. Ah, the vicious cycle – key lesson for me was that there are so many sharks in that business, but I suppose “you gotta do what you gotta do” and “it is what it is”
While it was stressful at the time, it gave me a critical lesson through a series of events that followed over the following one year.
It is while biotech stock prices will do whatever it wants in the middle of a bear market, they eventually recover to the fundamentals and more if you have the best-in-class or first-in-class product – this is more pronounced in biotechnology.
It is a tale of three stocks – Immunomedics (IMMU), Audentes (BOLD), and Dova Pharmaceuticals (DOVA). They gave me some seriously hard times at the end of 2018 and early 2019, they came roaring back in fewer than two years. Below shows what happened for each name, followed by key takeaways.
Immunomedics (IMMU)
Immunomedics develops antibody-drug conjugate based oncology therapeutics with lead asset being Trodelvy (a TROP-2 targeting ADC that is currently approved for triple negative breast cancer). In October 2018, the stock was around $30 and just started dripping down until below $20 by Christmas eve. They had received CRL in early 2019- which introduced massive uncertainty, but strong management team eventually got the drug across the finish line. Recently, the company was acquired by Gilead for $88 per share.
Audentes (BOLD)
Audentes specialized in developing AAV-based gene therapeutics for rare disease. In October 2018, Audentes stock was around $38, but also had large drawndown to below $30, but eventually got sold to Astellas for $60/share.
Dova Pharmaceuticals (DOVA)
Dova licensed in TPO receptor agonist, avatrombopag or Doptelet, from a Japanse pharma. In October 2018, the stock was at $20 and drew down to as much as below $10. They managed to sell themselves to SOBI for $29 per share in 2019.
Biotech has so many success stories like above – stock prices are driven by short-term oriented traders and a strategic investors (i.e. large cap biotech or pharma companies like Pfizer, Merck, Abbvie, etc.) opportunistically come in and swoop in for what appears to be a large premium to the stock price at the time of acquisition. These successful exit scenarios have three things in common
1. They are developing either first-in-class or best-in-class drug
Immunomedics developed Trodelvy. It is breakthrough medicine currently approved in late line triple negative breast cancer, but it will move into earlier line of therapy in TNBC, and other larger tumor types as well – TROP-2 is known to be expressed in lung cancers as well. It is an indeed pipeline-in-a-product type of asset.
2. Management team invest prudently in its innovative technology platform to drive scarcity value
Audentes proved its platform value through successful development progress on its XLMTM program and the management team prudently invested in its gene therapy manufacturing facility – one of the largest capacities in the world for mammalian cell based manufacturing. This made the company an attractive target for any large cap that wanted to jump into gene therapy – an area where it is very obvious that it will be the next-gen therapeutic modality after monoclonal antibodies.
3. Key shareholders must be willing to sell the company when the price is right
Dova had two key shareholders that were probably critical to sale process: Paul Manning and Perceptive Advisors. Paul Manning is a well-known biotech investor who recently sold AveXis to Novartis for a very high price and Perceptive is a hedge fund that is willing to sell for a quick high return. Often founders want to continue to grow their company rather than selling the company – with a willing seller in the board (i.e. board member from a financial investor), the company becomes much easier to be acquired for whoever that puts up a good/great price on the table as financial investors can provide objective opinion on the price.
Therefore, I have filled my portfolio with biotech companies with that type of potential – which is not too hard given high influence of VCs in the companies and VCs are no longer as patient as they once were.
It is hard to HODL onto your biotech stocks whose prices are falling with no news, but keeping above three things in mind helps me a bit to not only hold onto my positions, but also add to them as needed.
I forget who it was, but a very well-known investor said this – “you are making money in a bear market, but you just don’t know it at the time” – not word for word, but something along that line. I continue to believe that bear markets give you opportunities to buy high quality businesses at a more reasonable price (not necessarily dirt cheap price).
