Our fund’s stock-picking process involves an integrated assessment of clinical-stage biotech companies, focusing on the lead drug or “Crown Jewel” of the pipeline. This includes evaluating the drug’s Mechanism of Action, Disease Context, and forecasting its chances of passing through clinical studies and gaining FDA approval.
It’s important to have a deep understanding of how the drug works, the disease it seeks to treat, and the drug development process to develop an “intuitive sense” if the drug would become a success. On this front, we have been refining our experience and intuition for over two decades.
We also assess the drug’s marketing (i.e., launch) success, forecasting whether it can become a blockbuster. Considered a successful drug, a blockbuster generates at least $1 billion in annual sales.
In the last step of our stock picking process, we value the equity to determine its true worth (i.e. intrinsic value). Our technique is more sophisticated than the traditional Discount Cash Flow. Specifically, we take into our valuation the drug’s chances of clinical trial clearance and its probability of gaining FDA approval and marketing success. In contrast, the traditional Discount Cash Flow method is most appropriate for Bluechip equity. Early-stage bioequities are like babies. Ergo, it doesn’t make sense to use Discount Cash Flow to determine how fast the babies run when they are still working on crawling.