Post of the Day
August 18, 1999
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
Wow, the biotechs got hammered yesterday. Is this the beginning of a short term sell off, or do we go higher short term? Anybody notice a inverse coorelation between internet and biotech stock price movements?
Well, a lot of the loss occurred in two companies: Ligand (LGND) and Xoma (XOMA). Ligand lost value because the company said that it won't be profitable this year, which is what many companies expected. Xoma lost value because investors balked when the company didn't release data from a pivotal PIII trial, like the investors expected.
This aside, it bears saying that biotech stocks will never behave like Internet stocks. A large part of this reason comes from the barriers to entry. For Internet companies, any yahoo with a computer, a dream, and some programming and business knowledge can join the party. For biotech companies, any yahoo with a Ph.D. in a biological field (which means they haven't had the time to study business), a dream, a properly funded lab, previous peer-reviewed scientific papers, and as many as 5-10 years of clinical research with said dream can play. Then, the Internet company jumps online and starts selling/offering its product. Some succeed, some fail, but at least they're there and can start trying to work with the consumer. The biotech company must first demonstrate that the 5-10 years of experiments won't horribly damage the patients they have to try them on before they can even start the research. After that, they present the info in a peer-reviewed paper (to be potentially torn to bits by other Ph.D.'s) and submit to the devouring wrath of Cerberus--uh, I mean, the FDA.
After all, aside from the occasional aneurysm a customer might receive waiting for decent customer service, there's really little chance that an Internet company will truly hurt the lives of others. Biotech, on the other hand, must jump through scientifically complicated hoop after scientifically complicated hoop before they can even begin to offer their product. Because of this, many biotech companies fail. However, the ones who succeed catapult themselves to the world of large companies, due to the lack of product out there.
Keep in mind that a small biotech company is most likely run by scientists, not businessmen, and many of them don't know the first thing about PR, marketing, etc. Many of them are more academically inclined, in which being able to prove your theory is more important than being able to make a product based on that theory. So, you've got to be careful about them in this way.
How can you tell a successful company from an unsuccessful one? Research. Once again, here's where Internet and biotech are different. With an internet company, you have to understand the Internet and the product. Since you're reading this, you've shown you already understand the hard part. With a biotech company, you have to be able to understand the action of the product--which involves a deep understanding of biological science, in most cases, and it helps if you can read scientific journal articles. Take it from me: scientific journal articles make Alan Greenspan seem like "Dick and Jane."
Needless to say, many people don't do all the research they can, and when something smells funny to them, they bail. This can make a stock plummet, even though, from a scientific point of view, everything's okay.
In the end, good companies are hard to find. Should you stay away from biotech? I don't think so. I think biotech will eventually prove to do quite well. However, you should be prepared to do research like you've never done it before before you find a good company. They're out there. It might take years for them to succeed, so be prepared for the long haul. And don't compare biotech to Internet, because it just won't work very well.