Biotech Investors Are Completely Missing Something Right Now

One concept is receiving almost no discussion and I believe it will be an exploitable concept unless the market adjusts.

Post info: 3,628 words, reading time of 17 minutes.

Just a personal note this might be my favorite post I have written here so far. I have said before I love researching the history of biotech and specifically what worked in the past and why. I was able to do a lot of that here below the paywall. I hope you enjoy it, even if you disagree with my stance and conclusions. I’m not trying to be provocative. This is what I truly believe.

One last thing: Substack is telling me this post is too big for email. So if you are viewing in email you may want to read in the Substack app or browser for best experience.

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Biotech investors I need to tell you an uncomfortable truth.

M&A is not going to save you.

Again and again, I hear investors in this sector say we need M&A to spark a bull market. And again and again, that is just not proven true in the real world. In fact, every time we get a marquee acquisition the sector has a mild pop to start the day and never sustains it. Look to recent history when JNJ acquired ITCI at the start of the JPM healthcare conference. Even with a $13 billion acquisition the sector is up less than 5% as a whole since then. The XBI index actually went down in the week following the acquisition.

Remember when the Seagen acqusition was going to free up all this cash and spark life into the biotech sector? The sector was down in the six months following that acquisition. The XBI is only returning 10% CAGR since then, lagging many sectors. Certainly not that impressive or transformative.

Biotech acquisitions are a temporary hit of dopamine. If you happen to be holding a stock that’s acquired you get to feel smart and, sometimes, M&A can bail you out of an (unknowingly) bad decision like when I was holding Point Pharma and the company got acquired for what I thought at the time was too low of a price. (In hindsight, it was better to be lucky because that decision sure wasn’t good.)

But wait - doesn’t big pharma have a patent cliff where they need to replace a lot of disappearing revenue?!

Yes, and they will be foolish, twiddle their thumbs, and do share buybacks like MRK just announced along with other waste because that’s what they do now.

But the company I hold is simply too valuable for a big strategic not to acquire it!

Big Pharma routinely makes far more dumb acquisitions than they do smart acquisitions. Occasionally they strike huge gold (many times through pure luck) but for the most part a lot of acquisitions end quietly in write downs buried deep in SEC filings or earnings releases.

Besides…

If you truly believe you hold something of unique value, you should actually fear an acquisition. Why let someone take you out of one of your best investment ideas for a fraction of its true fair value? I mean think of how much work it takes to find a truly great investment idea!

Can you imagine if REGN had sold the company after the Eylea approval based on the 2011 estimates of peak sales in wAMD? Investors in the company would have lost out on $60b+ of shareholder wealth.

What biotech investors should be focused on is company building.

How DO you truly build a real company in biotech?

Amgen (AMGN), Biogen (BIIB), Gilead (GILD, Regeneron (REGN), Alexion (ALXN)…

All of the greatest historical success stories in biotech have one thing in common aside from the obvious things like smart people and luck.

There is one business concept that unites them.