Biotech investment, sooner rather than later

  Biotech and even the entire pharmaceutical sector are obviously risky, but at the same time have the greatest profit elasticity, that is, they can bring excess returns that are superior to other medical sectors for a long time, but they will also be significantly enlarged. The impact of market volatility. From the long-term trend of several representative sector-themed ETFs in the medical field of the US stock market, it is easy to understand why American investors “know that there are tigers in the mountains, and they tend to walk in the mountains.”
  Therefore, Biotech is not only a typical “high-risk + high-yield” track, but also has multiple characteristics such as “long-term growth + cyclical fluctuation + huge differentiation”. While generating increments, it is accompanied by high-intensity stock harvesting each other Therefore, in investment decision-making, it is necessary to adhere to long-term close attention, but also attach great importance to selecting stocks at the right time, avoid “eggitarian” or “passive and passive” strategies, and be decisive in starting high-certainty opportunities with a reasonable risk-return ratio. We must also resolutely avoid bubbles whose valuations are obviously unreasonable, so that it is possible to enjoy the long-term incremental dividends of the industry and avoid becoming the object of short-term stock harvesting.
  The goal of all of the following analyses is to find relative benefits and risks, and to increase the probability of an accurate judgment in a statistical sense. The method is to provide constructive guidance for the future by correlating various dimensional characteristics of biotech enterprises that have appeared in history with their investment returns.
data preparation

  Starting from all the biopharmaceutical companies that have IPOed in the US stock market since 1990, excluding the targets based on generic drugs, pet drugs, CXO, special medical food and other businesses, as well as Moderna/BioNTech/CureVac and other short-term factors with huge market value, long-term The conclusion forms the target of noise, eventually forming a list of nearly 600 companies.
  The return measurement is mainly divided into three large caliber types, simulating different holding strategies as much as possible.
  The first is the return to date: the core intention is to simulate the “passive holding” strategy, that is, the return on the assumption of silent holding without active operation after the IPO. The calculation method is that if the company has been acquired or delisted, it will be calculated as M&A/delisting Price calculation, if it is still a listed company and IPO before 2020, it will be calculated according to the average price from 2021 to the present (minimize the impact of this round of decline as much as possible), and if it is IPO after 2021, it will be calculated according to the latest price;
  followed by the highest return : The core intention is to simulate the strategy of “escape from the top”, that is, assuming that the maximum return that can be obtained after subscribing for IPO should be regarded as the limit of income space, and the calculation method is the multiple between the post-recovery IPO issue price and the highest share price, by the way Also use the highest price and the current price or the acquired price to get the maximum drawdown;

  Finally, there is the interval return: the core intention is to simulate the “timed exit” strategy, that is, assuming that the return that may be obtained in different years after the IPO is held, the calculation method is the multiple between the average price in the nth year after the issuance and the issuance price.
  As for the research and development information, it is to read the prospectus one by one (a huge workload, but reading the prospectus that stretched for 30 years before and after is also very emotional), and find out the research and development information at the time of IPO (do not rule out the subsequent turnaround). , including the main targeted therapeutic areas, drug types/technical paths, and stages of the core pipeline, through the number of pipelines and the probability of drug completion in each clinical stage (refer to previous research statistics, listed as 1, clinical phase 3 is 0.439, clinical phase 2 is 0.216 , 0.159 for the first clinical phase), to obtain the “expected drug product” indicator to describe the company’s R&D risk when it is issued.
overall trend

  First of all, it should be noted that since different periods are objectively one of the most important factors that cause different levels of returns, the statistical analysis of all dimensions in this article will first be based on the release year timeline, and then control the other dimensions separately. Variables, and due to the small number of issuances in some early years, some years that can be regarded as the same cycle are combined (such as 2001-2004).
  The popularity of IPOs in the Biotech industry fluctuates significantly with the stock price performance of the sector. During the window period of 2001/2008/2022, when the overall market fell sharply, the number of issuances and the market value will be obviously cold. At the same time, extending to the 30-year cycle, the market value of Biotech companies issued more than 20 years ago before 2017 was basically stable at 300-400 million US dollars (the increase was at most the overall level of the market), and the average year of establishment was 7 -8 years, the finished drug is expected to be stable at 0.3-0.5 (which almost corresponds to the pipeline with clinical phase II and III); however, in the past five years, especially since 2020 and 2021, there has been visible overheating, so that there is a A batch of crazy targets with a pre-clinical market value of billions of dollars. Later, we can see that the high market value of this wave of issuance has contributed significantly to the sharp decline and losses.
  Biotech companies can provide sufficient return elasticity, with an overall maximum return multiple of 3.4 times, but there are huge differences between individual stocks. These returns come from a small number of targets, and the targets with a maximum return of more than 5 times only account for less than 20%.
  However, there is bound to be a huge drawdown risk behind the high elasticity. Overall, there is a maximum drawdown ratio of 54%, and there is even a probability of more than half of the maximum drawdown exceeding 80%. Especially in the past five years, with the market heat The increase in the risk of a retracement increases almost in a straight line.
  As mentioned above, the overall cycle of Biotech fluctuates and individuals are highly differentiated. It is by no means an industry that can be held with confidence for a long time. Therefore, it is resolute to avoid the passive holding of “flat” after the IPO. Statistics show that this strategy will only There is a 1.6 times return, the rate of return is negative, the probability of principal loss is more than half, and the high return target that can achieve 5 times + multiple or 50% + rate of return is less than 10%.
  Although the individual targets vary greatly, it is interesting to see some statistical patterns when put together. From the perspective of time, holding for about 2 years after the IPO may be a reasonable cycle, which can not only eat the bulk of the return (the value may not be fully realized if it is short), but also avoid certain retracement risks (it may not be long if it is long). Cashing out more may overturn the car); From the perspective of valuation space, there is a more interesting and unexpected fact, the underlying situation is different, but the market value of the restoration rights from the time of issuance has basically remained in the past ten years. Around US$700 million, which means that the valuation at the time of entry largely determines the return space.
Segment returns

  The odds of different disease fields vary greatly, and there is an objective problem of choosing to determine fate: a large number of high-return star companies have appeared in the field of oncology, but in recent years, the number and valuation have been slightly overheated, which has significantly lowered the overall return; The performance of the immune field is relatively stable, and there are many targets with high multiples; the cardiovascular/metabolism and infectious disease fields are very few targets that bring high returns, while the vast majority of targets are in a state of loss; most of the neuro/psychological fields in the past decade The target has suffered losses; the field of rare diseases has benefited from the development of new technologies such as gene therapy, and has repeatedly performed well.

  Tumor has always been the top priority of Biotech. There have been a large number of well-known star companies in history. The highest multiple for a long time has been more than 5 times. However, with the significant increase in crowding in recent years, the number has surged. High valuations, especially after 2020, there are many targets that cause huge losses due to ultra-high valuations, which makes the overall return quickly pulled down near the profit and loss line.
  Self-avoidance is the most stable in almost all therapeutic fields. Even without considering the ultra-high return targets in the early years, on average in the past 20 years, it can stably generate nearly 2 times the long-term return and 3.5 times the highest return, and it can continue to emerge. High multiple target.
  Without considering several companies that have benefited greatly from the new crown epidemic, most of the targets in the field of infectious diseases have fallen into losses, and only a few hold super-heavy varieties with extremely high returns.
  Similar to infectious diseases, only a few companies in the cardiovascular and metabolic fields have brought positive returns, and most of the targets end up losing money. In fact, such super-large indications are not friendly to Biotech, and the market is not too keen for a long time.
  Neurological and psychiatric drugs have always received high attention from Biotech, but the returns are not quite matched. Except for the high returns in the early years, most of the targets have suffered losses in the past ten years, especially CNS (central nervous system) diseases. Almost like moths to the flames.
  With the rise of new technology paths such as gene and cell therapy, the field of rare diseases has continued to rise, and a number of high-return targets emerged from 2012 to 2016. After 2018, the market value of issuance was too high and there was a pullback, but there are still Many star companies that may become the next-generation platform technology generally have a maximum return space of about 4 times.
  A few drug development platforms that are not limited to a disease area tend to have high returns, while other disease areas target relatively mediocre returns.
type of drug

  Different types of drugs also produce great differentiation, especially for some emerging technology paths, and there is no such thing as “everything new must be good”: it looks a bit like a small molecule drug with backward production capacity, but it is a long-term stable source of return, even if it is a small molecule drug. In recent years, there have also been representative innovative companies; antibody protein drugs have continued to increase in popularity in recent years, but revolutionary innovation has been lacking, and returns have declined; gene therapy has seen high returns, but the technical path has not been fully verified, resulting in Not very stable; cell therapy has experienced an emotional roller coaster, and some years have been highly prosperous, but in recent years, high losses have occurred continuously, and it is currently in a depression stage; nucleic acid drugs have just been verified, and the number of existing companies is still small, but the returns are good; Fields such as vaccines and peptides are clearly not friendly enough for Biotech.
  The development path of small molecule drugs is the most mature, and there are still new directions and representative companies emerging. Over the years, they can stably generate more than 4 times the highest return space with a high probability, and are the type of drugs with the most balanced risk and return.
  Twenty years ago, a group of antibody discovery platform-based companies either grew into biopharma (biopharmaceuticals) or were acquired by giants, all of which brought more returns to investors; although the popularity has continued to rise in the past decade, most of them are at the target level. Small innovations, revolutionary innovations at the mechanism level are rare, coupled with the rapid rise in valuation, the returns have fallen significantly, and the maximum return space is mostly within 3 times.

  Gene therapy has nurtured a number of excellent innovative technology platforms, with high valuation flexibility, and the highest return multiple is often more than 5 times. However, because gene therapy drugs are rarely fully verified and the stock price is extremely unstable, the long-term return is not high.
  Represented by CAR-T (chimeric antigen receptor T cells), there has been a wave of cell therapy drugs, but due to the lack of complete validation and poor commercialization, except for a few targets, most targets have fallen into losses, and there are many targets. An ultra-high market value target suffered heavy losses.
  Without considering the special circumstances of the new crown vaccine, Biotech’s competitiveness against giants is not obvious, so it is difficult for star companies to appear in this field for a long time, and most of the targets are in losses, even the highest return multiple is difficult to exceed 2 times.
  Even without considering the special cases such as new crown/mRNA, nucleic acid drug technologies such as siRNA and ASO have been verified, which has promoted the emergence of more innovative companies. In recent years, most targets have the highest return multiples of more than 3 times, and there is obviously more room for development in the future.
  Although big pharmaceutical companies have a number of peptide blockbuster drugs, Biotech is not very involved in this field, and a few targets have seen a high return of more than 6-7 times. However, due to the failure to obtain the final verification, the long-term return is only 0.6 times.
Invest early

  The overall observation conclusion is that it is better to invest in Biotech sooner rather than later: in the preclinical stage, it is expected to obtain high returns after pipeline verification by betting on potential platform companies; when entering the clinical stage, by effectively releasing early stage companies Risks may bring about a relatively stable risk-benefit ratio; after entering the POC (confirmative test) stage, it may face situations where risks are not fully released but the valuation is already high; in the clinical phase III, the certainty is further improved, and the evaluation in the early years When the value is low, the return is good, but in recent years, the valuation bubble has seriously led to a decline in returns; more pipelines enter the mid-to-late clinical stage, which reduces the cost performance; a considerable number of companies with approved products can be regarded as small biopharmas, with higher returns in the early years But in recent years the number is not much.
  Specifically, many technology platform-based companies often choose to enter the capital market in the preclinical stage (the expected drug product is 0), and high-return targets frequently appear, but they need to diversify their investments to avoid large fluctuations in a single target, and they also need to pay attention to control valuation value to avoid risk-benefit mismatches.
  Companies that choose to enter the capital market with the core pipeline entering the clinical stage (expected 0-0.2 for finished drugs) are often released in the early stage, and the valuation is relatively reasonable, and the risk-return is relatively stable. In recent years, they have stably brought more than 4 times the maximum return space .
  The finished drug is expected to be 0.2-0.4. After the core pipeline enters the POC stage, it often brings about the dilemma that risk and valuation cannot be both. Therefore, at this stage of investment, high attention should be paid to the issue of cost performance.
  In the stage of large-scale clinical phase III verification (expected 0.4-0.6 for finished drugs), the risks in the early clinical stage are further released. The market value of the issuance in the early years is relatively reasonable and can stably generate the highest return of more than 3.5 times, but the valuation bubble in recent years has been significantly lowered. income.
  The finished drug is expected to be 0.6-0.8 (a number of pipeline echelons that have entered the mid-to-late clinical stage have been formed). At this stage, the cost-effectiveness has declined. A few pipeline echelons with really strong targets may obtain higher returns, but most targets are not stable.
  The number of companies whose finished drug is expected to be 0.8-1.0 (with multiple pipelines entering clinical phase III) has further decreased, and the individual differences have further widened. A few targets have obtained higher returns, but a considerable number of them have caused losses close to zero.

  Companies with approved products (expected drug product > 1) can actually be regarded as small biopharmas, which are often improved new drugs or some preparation technology platforms. Scientific risks are fully released. If commercialization is more successful, the returns will be higher. The target can generate a long-term return of more than 4 times, but in recent years, the IPO stage has moved, and the number of such targets has been relatively small.
Valuation level

  The valuation at the time of entry is naturally the most direct determinant of returns. In the process of the market-wide valuation center moving upward, a large number of high-return star targets appeared below US$300 million in the early years, and in recent years, they have gradually moved to 300 million. -$800 million range, higher valuations may have more risk-return mismatches (the “$700 million rule” mentioned above).
  If the market value of the issuance is less than 100 million US dollars, it may bring a super high multiple, but at the same time, it means that the maturity of the enterprise is extremely low, there will be a considerable probability of zero return, the overall return is very flexible, and the volatility is also huge.
  In the early years, there were a number of star companies with a market value of 100 million to 200 million US dollars, and there were a number of star companies with an average maximum return multiple of more than 5 times. However, with the upward movement of the valuation center in recent years, the high-quality targets in this range have been significantly reduced, resulting in the long-term position of most targets. loss.
  Issued with a market value of US$200 million to US$300 million, there has also been a high return in the early years and a decrease in subsequent high-quality targets. Especially in the past five years, most of them have fallen into losses. If the special case of Gilead is not considered, the overall long-term return will be reduced to about 2 times.
  The issuance market value of 300-400 million US dollars has gradually become the current mainstream issuance market value range, and the risk and return are relatively stable. Most of the targets can bring long-term returns of more than 1.5 times and the highest return of more than 3 times for a long time. However, in the past two years part of the loss target.
  The most recent market value range of issuance is between 400 million and 600 million US dollars. A number of technology platform companies have emerged that have contributed to stable and high returns. Although there have been fluctuations in the past two years, the overall highest return multiple is still more than 3 times.
  With a market value of 600 million to 800 million US dollars, there was a group of star companies such as gene and cell therapy that were considered to be highly valued at the time, and brought the highest return of more than 4-5 times. In the past two years, the number of this range has surged. The stage is much earlier and the returns have not yet been verified.
  Issued with a market value of 800 million to 1 billion US dollars, only in the past two years, there are many targets, including a number of star technology platform companies such as single base editors and targeted protein degradation, which will bring more than 3 times the highest return in the short term. However, the overall return was poor due to the market environment.
  Issued with a market value of 1 billion to 2 billion US dollars, mainly composed of leading companies in hot fields. Although a few targets performed well, there may be a situation where high valuations do not match the degree of risk release, and long-term returns are near the profit and loss line.
  As for the issuance with a market value of more than 2 billion US dollars, it belongs to the phenomenon of ultra-high valuation in the short term, and most of them are bubbles. Under the background of the adjustment of the market itself, they have become the cradle of “value destroyers”.
  In general, the U.S. Biotech market, which we have cited as a development target, has experienced technological development, commercial verification, and capital maturity in a short period of time (longer than China, and relatively short compared to the development history of the pharmaceutical industry). Pain, compared with China Biotech, it is still in its infancy. While metaphysically learning from its statistical laws, should it also metaphysically hold a more peaceful mind?