Don't Lump Biotechs With Big Pharma
12/19/05 - 08:10 AM EST
Gregg Greenberg
Secondly, R&D productivity at large pharma has not been as successful as the industry had hoped. Partly in response to this, large pharma partners -- and sometimes acquires -- biotech companies to augment their pipelines. While this succeeds in filling in their pipelines, usually it does so at a higher cost and lower margins. In the biotech industry, we have seen instances where developing a second successful drug has proven as challenging if not more challenging than developing the first one.
In response to these and other challenges, some pharmaceutical companies have begun restructuring efforts to streamline costs. How do you choose stocks for your fund? The Quaker Biotech Pharma-Healthcare fund is a long/short fund, with a net long bias. We take a "best ideas" approach to managing it and thus do not hold any default positions. Typically, we only hold between 20 and 40 names. As far as we know, we are the only biotech mutual fund with the ability to short. Our investment process is bottom-up and fundamental. Given the novelty, complexity and heterogeneity of the biotech industry, we believe that specific risk is the most important risk component. Primary research and close contact with companies are key to our investment success. We conduct scientific due diligence with the assistance of our Scientific Advisory Network, company visits, and our own primary research, modeling and valuation in this process. Lots of people buy biotech based on take-out speculation. Is this part of your thought process? No. We invest in biotech companies on their own merits -- good prospects for their development or marketed products, etc. If one of our holdings should happen to get acquired then so much the better, but acquisition expectations do not form a part of our investment case. With an area this speculative, does valuation matter? Valuation is critically important. Understanding the market's expectations for approval/non-approval or Phase III success/failure for any particular product vis-à-vis our own expectations forms the basis of long or short positions.
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