Wow October 2020 was a tough month and through election, the market has recovered and then more. A house-divided seems like things are setting up great for growth stocks (read: tech stocks) as gridlock for the next few years will continue to keep amazing growth stories on their runways.
Looking back to October 2020, it has been a painful month – particularly given that I own 100% long position. I don’t short / hedge because I like to believe in innovation and shorting just eats up WAY too much time (the time that I should be spending productively at work). Anyways, being 100% long has its pain points for sure.
This is particularly pronounced when investing in small-mid cap biotech companies – a lot of names move up and down for no particular reason. While macro factors are making big waves, it seems like derivatives of the macro factors – which are changes in positioning in individual stocks, are driving moves.
I actually continued to add in October opportunistically because I remember the lesson from my own personal, painful experience at the end of 2018.
As a reminder, end of 2018 biotech equity market was absolutely horrible – macro was bad and a lot of my favorite stocks were down -5% or more on seemingly no clear reason for many days. I also participated in anonymous biotech Bloomberg chats where people would talk about certain hedge funds suffering from severe drawdowns and/or redemptions. People would say “fund A is suffering significantly and they own a ton of XYZ stocks” and it would sometimes be followed by those stock prices declining – I guess people were selling their positions before any of the suffering fund would be forced to sell / liquidated. Gosh, there are so many snakes in that business.
I was really really stressed during those times – what I did not know at the time, I was learning a massive lesson. Over the next one year, there were a series events that taught me that biotech stocks can have some massive drawdowns in a bear market, but the ones with solid fundamentals will recover roaring back when the times are calm again.
At the time, three largest positions for the fund were 1) Immunomedics (IMMU), 2) Audentes (BOLD), and 3) Dova Pharmaceuticals (DOVA). These stocks gave me some really hard time at the end of 2018 and early 2019, but they came back as MASSIVE winners within two years. Below I discuss briefly on the stock price trend on each name and will talk about key three factors that they have in common and that I focus on when I decide what biotech stock to buy.
Immunomedics
Immunomedics develops ADC-based oncology drugs with flagship product Trodelvy now approved in late line TNBC (Triple Negative Breast Cancer). At the end of 2018, the stock drifted down from $30 in October to as low as $20 by Christmas Eve. While the stock price suffered from CRL in early 2019, they got the drug across the finish line and the company was recently acquired by Gilead for $88 per share.
Audentes
Gene therapy specialist Audentes saw stock price drift down from $38 in October 2018 to as low as below $20, and the company was eventually acquired by Japanese pharma Astellas.
Dova Pharmaceuticals
Dova licensed in TPO agonist Doptelet from a Japanese pharma and developed it for US and EU market. Dova saw its stock price decline from $20 in October 2018 to as low as below $10 by the end of the year. Dova also ended up being acquired by SOBI for $29 per share.
Biotech has painfully many cases where the stock price just acts crazy and a strategic buyer swoops in one day to acquire the drug. Not all biotechs though – but those that get attracted have at least one or more of below factors:
First: the company develops first-in-class or has clear potential to be the best-in-class to displace the current standard of care.
Immunomedics: Trodelvy became the standard of care in late line triple negative breast cancer and is expected to displace existing standard of care in earlier lines through clinical trials.
Second: Management team makes focused investments in strategic assets of the company and develop the strategic value of the company through scarcity value
Audentes: Their gene therapy platform was validated through XLMTM program (XLMTM is an ultra-rare genetic disease) and Audentes team built one of the very few large scale mammalian gene manufacturing capacities in the world – making the company an highly attractive acquisition target for any of the large cap pharmas who want to enter into gene therapy space with scale and speed.
Third: controlling / large shareholders in the board room must have willingness to sell or experience of having sold a company previously
Dova: Dova had two key shareholders – Paul Manning and Perceptive Advisors. Paul Manning is famous for having sold AveXis to Novartis for a very high price and Perceptive is a hedgefund, so they like quick return on invested capital. In many founder-led companies, the founders often want to continue to grow the company rather than selling at a high premium. When there are heavy weight financial investors on the table / board, they really help the board make an objective decision and this could be critical when there is a bid for the company.
So – with those experiences, I have companies with those characteristics in my personal portfolio and I was able to selectively size up in certain positions with conviction during the market meltdown in October.
It is very hard to hold onto your thesis when the market is going against you – please remember those three cases when the time comes tough – you know I am thinking about those three.
Bear market allows you to buy high quality assets at distressed prices – only time you will be able to buy that waterfront property with the best view in neighborhood cheap or even have opportunity to put in a bid, is when that owner has to sell.
Note this is not investment advice.
