#14 ?? So You Want To Be A Biotech Investor?

by Joey Bose and Gaetano Scuderi, MD

The biotech game is not for everyone. Here’s what you need to know to make good investment decisions in this high-risk / high-reward sector.

Investing in the biotech sector is not an easy feat. First, there is a technical barrier to entry due to the nature of the science ?? (not everyone has a PhD in biochemistry!). Second, ?? biotech companies do not behave like the WalMart’s and NVidia’s of the world (e.g., they aren’t concerned with actually generating revenue). And lastly, ?? valuing pre-revenue biotech research companies is not an obvious process (how do you put a price on a company that doesn’t make any money and is developing a drug that may never get to market?). Clearly, you are going to have to do some extra diligence and ???♂? detective work… but if performed correctly, could pay off big time (10-20x return on investment is the goal in biotech).?

In this post, we’ll give you some simple, actionable insights to make better?investment decisions in the biotech sector.?

Technical Challenges

Biotech is a super niche industry with its own lingo and knowledge assumptions that keep many non-technical people out of the game. While an advanced degree in biochemistry or medicine might be necessary to understand the nitty gritty of the science, it is not necessary to make good investment decisions. There are certain characteristics of strong biotech companies that might make them a good buy.

These indicators include, but are not limited to:

?? ?Drug development projects that employ novel mechanisms of action?to address unmet clinical needs

?? A Board of Directors with Big Pharma experience and capital raising expertise, lplus an A+ Scientific Advisory Board

?? Management’s track record of accomplishing the milestones that they promise investors

?? ?Strong intellectual property?covering composition of matter and methods of use

?? A track record of successfully raising capital predicated on value-adding milestones (i.e., valuation inflection points)

How Is Value Created?

Unlike cash-flowing operating companies like WalMart or NVidia, the goal of biotech is generally not to take drugs to market and become full-fledged operating companies that generate income. Instead, the biotech model is “acquisitive”, in which small biotechs (like Cytonics) develop their experimental drugs through Phase 2?and then bring in Big Pharma partners to either acquire their entire intellectual property?or license the development and manufacturing rights to specific drug assets in the biotech’s pipeline. Shareholders make a return on investment either through the private acquisition?of their shares or an Initial Public Offering?that precedes a licensing deal.

Fortunately, drug development follows a formulaic path with well-delineated milestones, allowing new investors to quickly scan news releases to position a potential investment within the drug development lifecycle:

?? First,?preclinical (animal) data supports the safety and efficacy?of the drug prior to experimentation in humans. Convincing preclinical data is packaged in an Investigational New Drug (IND) application and sent to the FDA for approval to begin a Phase 1 human study.

?? First-in-human?Phase 1 studies are designed to support the safety of the drug in a small patient sample (usually less than 50 participants), and often provide some evidence of drug efficacy in treating the disease as a secondary measure.

?? Once safety is established, Phase 2 trials provide a robust analysis of the drug’s efficacy in a large patient (hundreds) population, often by exploring the dose-dependent effects. Big Pharma players scour promising Phase 2 trials for drugs to acquire.

?? Finally, a large Phase pivotal 3 trial is conducted to support the safety and efficacy of the drug in a very large sample (thousands of patients). Phase 3 data is packaged in a New Drug (NDA) application and sent to the FDA for final approval to begin manufacturing and selling the drug.

This well-charted course also benefits biotech companies, allowing them to plan financings around key value-adding catalysts with a reasonable degree of certainty.?

This iterative process of?raising capital?predicated on a foundation of achievement is core to the overall investment thesis that the enterprise value?of the company increases exponentially as the drug’s risk of regulatory failure declines.?

If you understand this concept, and the types of de-risking milestones?that are material, then you are 50% of the way to becoming a diligent biotech investor.

What’s It All Worth?

Unlike an operating company that is cash flow positive, clinical-stage biopharma companies are in the business of spending investor dollars to drive research and development and increase the theoretical purchase price of the company (i.e., the acquisition price). This prevents us from simply looking at a Price-to-Earnings or Price-to-Sales ratio to determine whether the enterprise is appropriately priced in the market. What we are going to have to perform requires a bit more nuance and some financial forecasting wizardry. Equities analysts use a technique called risk-adjusted discounted cash flow (rDCF)?analysis to calculate the?theoretical value of a company’s drug development pipeline.?

The fundamental idea is that the value?of biotech drug development pipelines increases exponentially?along the FDA’s clinical trial pathway since success at each Phase “de-risks” further development.?

The general idea of rDCF analysis is that the value of a company’s drug development pipeline can be determined by summing the income generated?from each drug over their?patent lifetime (10-20 years),?and then “discounting” this sum?to account for the risk of failure?and the?opportunity cost?of the investment.

Here’s an example output of a rDCF model for Cytonics

As you can see, Cytonics’ value could increase exponentially as our R&D program advances through clinical trials.

Why Invest in Cytonics?

? With over 8,000 patients?successfully treated to date, the clinical and commercial success of our first-generation FDA-approved therapy for OA is proof that our core technology is an effective treatment for OA.

?? With over 100 years combined experience?in the medical and biotech fields, the Cytonics team possesses the technical competencies to navigate the FDA regulatory framework. This is further evidenced by the FDA approval of our APIC medical device.

?? ?Our second-generation therapy, “CYT-108” is on the cusp of completely disrupting a $240 billion market?for osteoarthritis treatments.

?? If approved by the FDA, “CYT-108” may be the first and only OA therapy capable of actually treating the root cause of the disease?and providing lasting relief – The Holy Grail of regenerative medicine.

??? Our intellectual property portfolio includes 24 U.S. and international patents, ensuring a strong competitive edge.

?? You are investing as we advance through our most significant milestone to date – the first-in-human Phase 1 clinical study of CYT-108 as a treatment for OA of the knee. This is a major valuation inflection point!

?? We are graduating from a pre-clinical drug discovery?company to a ?? clinical-stage biotech … the single ?? most significant milestone in Cytonics’ history and a major valuation inflection point!

Ready to become a shareholder? Visit invest.cytonics.com.

This communication?may contain forward-looking statements and information relating to, among other things, the company, its business plan and strategy, and its industry. These statements reflect management’s current views with respect to future events based information currently available and are subject to risks and uncertainties that could cause the company’s actual results to differ materially. Investors are cautioned not to place undue reliance on these forward-looking statements as they contain hypothetical illustrations of mathematical principles, are meant for illustrative purposes, and they do not represent guarantees of future results, levels of activity, performance, or achievements, all of which cannot be made. Moreover, no person nor any other person or entity assumes responsibility for the accuracy and completeness of forward-looking statements, and is under no duty to update any such statements to conform them to actual results.