Investment Strategy
Invest with confidence in the biotech industry through our comprehensive investment strategy.
Proprietary Integrated BioSci Investing
Known as Integrated BioSci Investing, our investment practice is inspired by various gurus, including Peter Lynch, Warren Buffett, Phillip Fisher, and Ben Graham. We integrate what we learned from those luminaries with various disciplines (i.e., medical, scientific, and market expertise) that are adapted specifically to biotech investing like a custom-made suit. In our approach, we believe that physicians/scientists with market expertise have a tremendous edge in biotech stock picking.
Our fund focuses on stocks with a market cap of at least $1B. After all, it takes roughly $1B for a company to fund a drug from bench research to commercialization in a seven to ten-year-long process. If the company doesn’t have adequate market capitalization, the stock tends to crash whenever it does a significant public offering. Our sweet spot is small-cap stocks (i.e. $250M to less than $2B) which have much more room to grow. At the same time, their shares won’t crash whenever they execute an equity raise.
Unique Binary Event Forecasting
As a pioneering biotech hedge fund, we have a unique edge in binary event forecasting. Our deep understanding of the biotech industry allows us to make calculated forecast of the outcomes of major clinical and FDA events. By leveraging this expertise, we position our clients to capitalize on the significant market movements associated with these events.
Deep Specialization and Diversification in Biotech
With our sector expertise focused on biotech investments, we are positioned to outperform in this niche market. Our investment approach concentrates on the growth biotech stocks category, allowing us to capture the tremendous upsides in clinical stage and early product bioequities. Additionally, we diversify our portfolio across promising growth, turnaround, and stalwart biotech stocks to mitigate risks and maximize potential returns.
Long Focus on Common Stocks of U.S.-based Public Equity
Similar to Warren Buffet, our fund approaches stock buying as investing in a piece of a wonderful business. As such, we would acquire mostly long positions for our investment. There are more upsides to going long while having limited risks. By going long, there is a potential to gain multiple folds on an investment. In special situations, however, we may go short. We let the market dictate our strategy, and our structure always follows our strategy. To hedge against the elevated shorting risk and its limited upsides, our short positions make up no more than 10% of the fund’s capital.
As the most lucrative biotech investment opportunities reside in the USA, we focus our investments on public equities listed on a major U.S. exchange (i.e., NYSE or NASDAQ). Information and filing for such companies are more transparent and readily available. Accurate information tends to produce robust returns. The US market also reimburses drugs at a premium, boosting the profit margin for our portfolio holdings.
While we primarily invest in common stocks, we may also occasionally allocate up to 10% of our capital in options. We anticipate holding around 30% of our capital in cash, cash-equivalents, and/or U.S. Treasury securities (i.e. T-Bill) at our inception. Based on market conditions, we will vary it roughly between 10% and 40%.
Long Term Holding
Aligned with Warren Buffett’s wisdom, we are patient with our investments to capture the most upsides. This entails holding stakes in companies for many years from their preclinical/clinical phases to early product launch. At that point, we would usually take partial profits to generate more capital and minimize risks while leaving a portion of the shares to ride more upsides. Depending on market conditions, we might take profit earlier than maturity. This strategy allows us to bank our profits and at the same time enables us to let our success run its course.
Differentiated Stock Picking Process
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 proprietary 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.
Strategic Portfolio Allocation
The fund’s portfolio division comprises three segments: long-term holdings (60%), power trading positions (10%), and cash (30%). Our high cash position enables us to capture opportunities as they arise. We will deploy much more cash during a bear market to take advantage of deep bargain opportunities. Conversely, we will increase our cash position in a bull market to reduce our risk exposure.
