It has been a long break for me and I have been certainly enjoying it to the max. It is definitely refreshing to actually be able to take time off during the last week of the year and reflect on 2020 – whether it be my personal life or professional life or even companies – this is a luxury that I have not had an opportunity to enjoy probably since I graduated from college. There is always something going on – whether it be pitchbooks for the first week of January or random potential deal leads that I need to chase or random PR that often ruined my last week.
One of the things that I mused over this holiday was biotech valuation – the dazzling valuation that appears to have been elevated at least partly by aggressive buying by ARKG and its avid followers (myself included!)
My conclusion was that we are now entering the age of platform value in biotech – this is enabled by inflecting curve of genomic data generation that is finally meeting the massive computing power that can identify signal from the noise. Clearly investors are very excited about the future genomics-enabled world that is 5 or 10 years out.
The critical scale of data probably has not been hit yet – after all, we only have a few million data points that can be leveraged for true data analysis – one that is stored at Regeneron and its Genomic center – this means the true inflection point is still not here and the potential could be even higher than our current imagination.
Seagen ($SGEN), Alnylam ($ALNY), and Crispr stocks ($CRSP, $NTLA, $EDIT) are generally consensus short ideas in the biotech hedge fund community largely based on valuation. Among them, I found there are three large themes that are pulling them together.
Strong management team
Strong management team has rich and deep experience, great decision making skills, and wide network that enables acceleration of growth by identifying and working with the right partners (both strategic partners and financial investors).
Strong flagship program with great data
At the end of the day, the language of biotech is data – however, if there is a program with strong management team and data in a company, it is very easy for investors to have positive read-through to other programs that may not have strong data yet but are on the way to there – this gets included in the valuation of the company. There may not be a “true” consensus on which pipeline asset is included or not – this would depend on each investors (love the diversity of ideas), but aggregate value will help push market capitalization higher.
Need to be in the “hot” space
RNAi and targeted oncology therapies are very strong these days, but there have been steady investment into this space for the past 10 years. It is only this year that capital flow truly inflected to push stock prices higher. Often times investor enthusiasm often moves up and down – for instance, antibody-drug conjugate has been moving back and forth between hot and not over the past two decades because investors move around like sheep left and right. Even large cap pharma ditched ADC a long time ago because they thought it was not great (this led to founding of Seagen / $SGEN).
CRSP stock has been very hot recently because of the promise of gene editing – it is truly sexy science. Given the run-up, I am less enthusiastic about gene editing, but remain VERY VERY Bullish on what will come out of explosion of genomic data – which I think we are still in the very early phase.
My pick is with platform companies who have proven drug discovery platform, will benefit from increased genomic / protein information, and are in hot space – targeted oncology companies, like antibody-drug conjugate companies ($SGEN, $ZYME, $ADCT) or cell therapy companies ($ALLO).
Their valuation gain have been relatively modest in the past few months and should continue to “pump out” drugs with increasing efficacy and better safety profile (i.e. higher probability of success) driven by greater genomic data and better drug design – all supported by extensive drug development and regulatory experience of strong management team.
Let’s go strong into 2021!!!
Are you bullish on ADC? Or do you think it has had its run? Share your thoughts below!
