Editor: On this blog, I aim to share some of the basics of personal finance that have helped me in my investing goals. I am firmly in the low-cost, passive index investing camp. In other words, a good little Boglehead.
But there are many roads to Dublin. We do not have to traverse them all, but it widens our perspective to know about them. Here is one such example. What follows below is a guest post from a close friend- an Anesthesiologist who retired from clinical medicine in his mid-40’s to pursue his passions outside of medicine. He will stay anonymous here. I knew he’d Fat FIRE’d (morbidly obese FIRE may be more like it) a couple of years ago. That is, he was financially independent (FI) and retired early (RE). And he had done so on a sizeable nest egg (the “fat/obese” reference- as opposed to lean FIRE). I asked him to share his story and this is what he sent me:
Another Road to Dublin
My approach is a buy and hold ( NOT momentum based), fundamental (NOT technical based), value (NOT growth based), small-to-mid cap biotechs focusing on disease therapeutics in clinical trials (NOT diagnostic tests or medical devices or health care provider/insurance/IT) . My preference is for best in class or proven mechanism (vs completely novel first in class mechanism) bets, but not always.
I try to enter a stock in the midst of some overcorrection, by my perception, to some share-diluting or attack-by-shorts or selling-the-news event.
Is this not Market Timing?
The prevailing wisdom that you cannot time markets makes sense. My response to that is that unlike other industries, developing-stage biotech companies often have obvious binary events like data success or failure; the prospect of raising capital or share dilution; competitor announcements. These have such large effects on share price that I feel okay jumping in when an opportunity presents itself. General market jitters can drive down the entire biotech sector (irrationally, in my opinion) and given that I perceive that demand for biotech mostly has little to do with rest of economy, these downturns also present buying opportunities.
How do you pick your Stocks?
My stock screener is a close friend from college who grew up to be a super smart hedge fund manager I completely trust. I also analyze the holdings of some investment advisory firms that I have been following over the years. One of them is a guy named Kolchinsky at RA Capital Management. From this superset, I investigate and pick.
Doing the Homework
You can access what these and any other smart money funds are investing in by accessing their 13f filings with the SEC on websites like whalewisdom.com or Fintel, etc. The information is from filings which are at least 3 months behind, but for buy and hold longer-term tortoise investors like us who are not racing to beat some benchmark or chasing quick return to beat competitors, this info is useful. You do not need to be a subscriber to access and sift through these filings.
You can value a company product by looking at:
1) the disease prevalence/patient population size in USA/ease of diagnosis and captivity-urgency of treatment (ed: how likely it is that people will seek treatment for the condition) and
2) at the approximate price range of other existing approved drugs in that relevant space.
You can then calculate the potential annual revenue from the product. Multiplying this projected annual revenue by around 4-6 gets you an estimate of future fair market cap once the drug is approved and selling. So, a drug with potential $1B in annual sales should contribute about $4B-$6B to the market capitalization of the company. Compare this future market cap with the current market cap and you should focus if there is opportunity for >3-10X gain.
How it all began
I started with Neurocrine Biosciences, Inc. (NBIX) in the fall of 2013. The product of interest was a VMAT2-inhibitor, valbenazine, for the indication of tardive dyskinesia.
The investment thesis around this drug ran as follows:
1) the indications and patient base for antipsychotics had expanded significantly from just Schizophrenia and related disorders to Bipolar Disorder as well.
2) The assumption that atypical new generation antipsychotics would not have tardive dyskinesia was turning out to be incorrect.
3) There were no approved drugs for tardive dyskinesia and valbenazine had FDA Breakthrough, fast track status.
4) There was already a chemically similar FDA-approved VMAT2-inhibitor tetrabenazine for Huntington’s disease that was expensive and suffered from difficulties with frequent and varied dosing. It never got much clinical traction and never pursued indications for other movement disorders like Tardive dyskinesia, Tourette’s, etc.
The drug had just gone into Phase 2 and actually stumbled and failed to meet endpoints. The stock sunk from from $16-20 per share down to $8-9 per share on this news. However, we believed that the interobserver reliability was flawed and once they fixed this in a revised trial, the drug would work. That’s when I jumped in with everything. Within 6 months, the stock had gone back to over $16 a share, and I just held on. The trials went well, the drug got approved, and the drug launch sales continue to grow nicely quarter over quarter. (Ed: NBIX is $102.07 at close on Jan 13, 2020).
And the rest is history
For ImmuMedics Inc. (IMMU), the product is an antibody-drug conjugate aimed at TROP2 antigen- a developmentally early antigen expressed on some cancers- carrying a payload of topoisomerase inhibitor. The main focus was treatment refractory triple negative breast cancer patients. It had much better objective response rates and progression free survival than standard of care. The stock had already gone from $2-3 per share to about it to over $20 per share in a couple of years. I figured I had missed the boat. Then, in Jan 2019, the company received a CRL- Complete Response Letter rejection- from the FDA and the stock tanked to $11 a share. The company claimed the FDA issues were with Chemistry/Manufacturing/Control issues. I bought a large chunk at $13 a share. The stock is now back up to about $20 a share. The FDA response date is set for June, 2020. We will see.
Revance Therapeutics Inc. (RVNC) is developing a long acting version of botox. They have phase 3 data for aesthetics and they will have late stage data on several clinical indications (cervical dystonia, upper limb spasticity, Plantar fasciitis) available later in 2020. They did a capital raise in december 2019 and the stock diluted down to $16 per share. I jumped in.
Precision Biosciences Inc. (DTIL) is a genome editing company that is focused on allogenic CAR-T therapies. Successfully pulling off an allogenic off-the-shelf CAR-T will inevitably beat out the very expensive autologous bespoke CAR-T already approved or in the pipeline. Since the IPO at $16/share in April 2019, the stock has seesawed. I bought a large chunk at $10 a share.
I started in 2013, putting in all my savings, about $500k into NBIX. I did sell some of it in 2019 to pay off the house and to plow into some other opportunities I didn’t want to miss out on. These four stocks are my entire retirement portfolio- about $7.3M at this time (January, 2020).
Editor: And we wish you luck going forward!
This is a great story of individual stock picking working out. But, buyer beware, this is NOT the norm. Over the long term, less than 5-10% of professional money managers beat the market, let alone individual investors. I’ll admit, it is way beyond my risk tolerance to be invested in so few securities. Plus, I wasn’t picking the right friends in college. Kidding aside, this is an important point- most of us do not possess the knowledge or skills to pick out the winners from the losers. Even if we do, the laggards in the portfolio usually bring down the total return to underperform the benchmarks.
I do not have any financial relationship to any individuals or companies mentioned in this post at this time. In the future though, I may be tempted to put in some play money into one of these or similar companies. Individuals stocks, however, are only 5% of my portfolio, and for the foreseeable future, will remain so.
Update: March 2020: When the market got hammered earlier this month, I bought some of the aforementioned stocks to play with. The amounts are small and individual stocks altogether still make up less than 5% of my portfolio.
Thank you for reading. Thoughts? Questions? Pen them here.
