About the Dose
Escalation Capital (DEC) Newsletter
The DEC newsletter aims to create a public, 3 to 5 year
biotech investment track record for the author, who will invest $100,000 of his
own capital and share investment decisions and performance updates in detail.
Disclaimer: neither the
information nor the opinions presented by DEC should be understood as
investment advice.
About the Author
Biotech professional by day and biotech investor by night, the author of DEC trained as a scientist with degrees from Princeton and Stanford, and has been working in the drug development industry since 2008 and investing in stocks since 2006. He has played key roles in creating, investing in, and running two biotech companies that are now public.
Posting of Investment
Decisions
Trades will be published as soon as possible. The
reader is invited to read along as the investment decisions play out. Overall
performance will be updated at least once per quarter.
Investment Philosophy
DEC invests based on deep diligence of underlying biotech
company fundamentals, and makes the assumption that a very well researched,
ultra-specialized fund can outperform the majority of institutions investing in
the biotech sector.
Investments are made for the most part in companies that are
in preclinical or early clinical development, before proof of concept (POC) for
a particular drug has been achieved. In investment terms, a POC event is when
the market believes that a drug has been demonstrated to work and the valuation
of the stock rises significantly to reflect a high likelihood of approval and successful
commercialization.
Simply stated, the goal is to purchase great companies
before the rest of the market thinks they will be successful in commercializing
high value drugs.
Risks and Performance
Goals
In comparison to other industries, the biotech sector is
particularly volatile. Boom and bust cycles (market bubbles) are part of the
game. Therefore, investments in biotech
should represent a small percentage of a well-diversified portfolio.
DEC’s goal is to outperform the NASDAQ Biotechnology Index
(NBI) over a 3-5 year period.
Investment Criteria
Poor investment decisions are inevitable, but thorough and
incisive research can weight the odds in one’s favor by reducing the frequency
of foreseeable mistakes. Here are the criteria that DEC uses in screening all
possible biotech investments.
Unmet Medical Need
DEC looks for companies with drugs being
developed for diseases that cause significant limitations in quality of living
and/or mortality, for which existing treatments have little benefit or present
serious side effects.
Because they are urgently needed, these drugs command a high price point and don’t need to have a perfect safety profile to gain regulatory approval.
Because they are urgently needed, these drugs command a high price point and don’t need to have a perfect safety profile to gain regulatory approval.
Economic Potential
High-risk investments should present
opportunities for very high yields. Therefore, companies with drugs that are
projected to achieve significant revenues (in excess of $500 million to $1
billion/ year) are preferred.
Criteria used in forecasting the market
opportunity include understanding the current cost of care per patient, the
addressable patient population size, and the projected market share.
Competition
This criterion speaks for itself. Avoid drug
programs without a clearly defensible competitive edge.
Probability of Clinical Success
Figuring out which drugs are most likely to be
successful requires specific industry and scientific knowledge and is probably
the hardest prediction to make.
Care should be taken in understanding whether
liabilities exist for a particular class of drugs in general, and whether a
particular drug in question has toxicology, pharmacology, and efficacy data
that are positive and predictive of clinical success. A feasible route for
manufacturing and formulation is also needed.
Experience of the Team
Drug development is a very complex and
challenging endeavor, and companies with novice or B- teams face an uphill
battle in creating substantive value (whether through shortfalls in drug development
or business development).
DEC invests in management teams that have
already been successful at developing and creating significant value for drug
programs.
Financial Health
Companies should have more than enough cash on
hand to achieve value creation milestones without needing to resort to
fundraising. In general, companies with less than 1.5 to 2 years of cash runway
will be evaluated with extra caution.
Meaningful Milestones
A company may be well funded with great drugs in
their pipeline. But sometimes near term milestones are unlikely to de-risk the
program and drive significant value appreciation. For example, an efficacy
trial may be statistically underpowered to demonstrate efficacy.
DEC looks for companies that are on track to
achieve value-driving milestones in no more than 12 months from the time of the
investment.
Platform Potential
Extra points are given to companies with
promising drugs in development that are part of a broader innovative technology
platform. The market will assign additional value to a proof of concept
milestone if the underlying platform is also being de-risked and is applicable toward
additional disease indications.
