CLASSES TO GO! Investing In Biotech: High Risk Or High Reward? Cy Lynch, Manifest Investing

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BETTERINVESTING NATIONAL CONVENTION Biotech Companies Defined Generally businesses applying technologies (genetic engineering, recombinant DNA techniques and the like) to: –Identify targets for drug development –Transform biological systems into useful processes and products Many are small companies with no current product, but hoping to come up with a blockbuster

BETTERINVESTING NATIONAL CONVENTION Challenges Of Investing In Biotech Requires knowledge of drug approval process and perhaps specialized knowledge of industry Can be speculative, not unlike the lottery (especially with small companies): –Great reward if you’re lucky or “right” –Great risk of failure – you could lose it all!

BETTERINVESTING NATIONAL CONVENTION “Tiers” Of Biotech Companies 1.Established and large with one or more successful products on the market 2.Those close to profitability with growing sales from drugs on the market or potential big sellers in late-stage clinical trials 3.The rest, just having products still in the discovery or clinical stages

BETTERINVESTING NATIONAL CONVENTION Qualities Of Investment-Worthy Biotechs 1.Successful products on the market 2.A deep product pipeline with late-stage candidates 3.Drugs and candidates that target large or underserved markets 4.Partnerships & marketing agreements with blue-chip drug companies 5.Research & development spending 6.Enough cash to fund operations for at least two years 7.Experienced management 8.Favorable prospects and value based on your study

BETTERINVESTING NATIONAL CONVENTION Pharmaceutical Approval Process Pre-Clinical – 4 to 5 years Phase I – 18 months Phase II – 2 years Phase III – 3 to 4 years Marketing approval by the FDA – 1 to 2 years

BETTERINVESTING NATIONAL CONVENTION Pre-Clinical Stage Typically involves years of testing on animals and human cells Successful results lead to Investigational New Drug (IND) application to FDA

BETTERINVESTING NATIONAL CONVENTION Phase I Clinical Testing Typically takes several months Involves testing in small number (20-100) of healthy humans Primary concern is safety Also determines how is drug absorbed, metabolized & excreted Must be “reasonably safe” About 70% of drugs pass

BETTERINVESTING NATIONAL CONVENTION Phase II Clinical Testing Takes several months to two years Most involve “randomized” trials on up to several hundred people in two groups: –Patients receiving experimental drug –Control group receiving standard treatment or placebo Often “blinded” Seeks comparative data on relative safety and effectiveness of new drug About one-third pass first two phases

BETTERINVESTING NATIONAL CONVENTION Phase III Clinical Testing Typically lasts several years Expensive, large-scale testing in several hundred to thousands of patients –Usually randomized and blinded Seeks more thorough understanding of effectiveness, benefits and range of possible adverse reactions 70-90% of drugs completing Phases I & II successfully complete this phase Company can then request FDA approval for marketing the drug (New Drug Application [NDA])

BETTERINVESTING NATIONAL CONVENTION NDA Submittal To FDA Lengthy documentation FDA action: –Approval –Denial of application –Sends the company back for more study or data

BETTERINVESTING NATIONAL CONVENTION Phase IV Clinical Testing Comes after FDA grants NDA and drug is on the market Can be voluntary or required in conditional approval Potential objectives: –Comparisons with existing drugs –Monitor long-term effectiveness and impact on quality of life –Cost effectiveness relative to other therapies

BETTERINVESTING NATIONAL CONVENTION Summary – New Medicines Timeline

BETTERINVESTING NATIONAL CONVENTION Six “Foolish” Commandments of Biotech Investing Author’s (Brian Lawler, Motley Fool contributor) disclaimers: This isn’t a complete list of Biotech Commandments While the bad characteristics mentioned aren’t necessarily an investment time bomb waiting to explode, they indicate more risk than for the average biotech.

BETTERINVESTING NATIONAL CONVENTION Biotech Commandment I Drugs that fail their primary endpoints in clinical trials, yet still get submitted to the FDA [ ], usually do not get approved.

BETTERINVESTING NATIONAL CONVENTION Biotech Commandment II Biotech companies located on Pink Sheets, over-the- counter exchanges or even the American Stock Exchange often make bad investments.

BETTERINVESTING NATIONAL CONVENTION Biotech Commandment III Expect volatility in the share price of biotech stocks whose companies don't have revenues or approved drugs.

BETTERINVESTING NATIONAL CONVENTION Biotech Commandment IV Drugs formulated to treat certain types of diseases have a much harder time gaining regulatory approval than do other drugs.

BETTERINVESTING NATIONAL CONVENTION Biotech Commandment V As a clinical trial's size and length increase, so do the complexity and probability that something may go wrong.

BETTERINVESTING NATIONAL CONVENTION Biotech Commandment VI Stay away from unproven technologies. You have no idea whether the tech even works in people, let alone the specific drug you're investing in.

BETTERINVESTING NATIONAL CONVENTION Summary Biotech can be rewarding but carries high risk of volatility and capital loss All but the most aggressive investor should concentrate on established, Tier 1 biotech companies When considering Tier 2 companies: –Acquire knowledge of the bio/chemical nature of the just approved, or late phase developmental, drug(s), its potential market and competition –Understanding of where developmental drugs are in the approval process Avoid the rest (Tier 3) with just “stories” & dreams

BETTERINVESTING NATIONAL CONVENTION Sources Ashton, Zeke, A Foolish Checklist for Biotech Investing, June 13, Lawler, Brian, The Commandments of Biotech Investing, August 28, growth/2006/08/28/the-commandments-of-biotech- investing.aspx growth/2006/08/28/the-commandments-of-biotech- investing.aspx Feuerstein, Adam, Biotech 101: The Road to FDA Approval, July 5, road-to-fda-approval.html road-to-fda-approval.html

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