Biotech euphoria driven by fundamentals

0:09Welcome back to Investing Experts, Jonathan Faison, who runs ROTY Biotech Community on Seeking Alpha. Really happy to have you back on the show, Jonathan. Thanks for making the time. Hey, thanks, Reena. Great to be here with you. Great to have you. We haven't had you on in quite some time. Biotech has been, as we just discussed before hitting record, you know, doing pretty spectacularly lately, but that comes with its own set of risks and cautions. So here we are, summertime for most of us, July 2026. What would you say to investors right now about the sector you focus on, biotech? Great question.

0:51It's not only about the sector, but it's also the area I focus on within the service. We have over 500 investors and traders who trade every strategy area niche of biotech you can think of. So it is nice that everybody's exchanging their ideas and trades. But for me personally, it's more late stage biotech and commercial. So what's encouraging to me is from now into the 2030s, you're going to have an increasingly percentage of the XBI of biotech where these companies traditionally are cash burning, they're speculative, they're basically throwing drug candidates at the wall, seeing what sticks.

1:33And what's nice here is that we have quite a few of them that are going to become commercial states having approved products. So that bodes well for the strategy because that's the hunting ground for me personally is setups where they have either clear paths to market. If they're clinical stage, they are not science projects or they are commercial and we're looking at, you know, launch prospects sales over a multi-year time frame. So it's a very fun sandbox to be playing in right now. But with the usual caveats that the sector has definitely been heating up as late, that's definitely a lot of optimism and euphoria for sure.

2:11What would you say in terms of the euphoria that's coming? How much of it do you feel like is deserving of a euphoric definition? And what is the caution involved there? Like, what's had you most excited? And what would be the flip side of that excitement? I hate to say this time is different, but it is interesting how in 2021, when we had that peak of the biotech sector, the bubble, etc. It was marked by having a lot of very, very speculative companies coming to the market via IPO. I call those situations, you know, grab the money and run, you know, where they're trying to raise money and then a drug candidate fails and the stock does badly.

2:55Investors get burned and people stay away from the sector, you know, hands touching a hot stove. And what's nice this time around is it feels like much of the current optimism or euphoria is driven by fundamentals, the very, very heavy M &A appetite. Even within the last month, we saw three$10 billion plus buyouts with Nuvalent, Apogee, and Krenetics. Krenetics was announced today. And so also I'm seeing with a lot of the newer IPOs coming to market, what's been nice is several of them have been pretty good performers. They've reported positive results. Not all, of course, but there's been enough of them that have performed very well that investors have been rewarded, which in turn is a self-reinforcing cycle.

3:47If you're an investor in the stock market and you keep doing well in a sector, you'll probably stick with it. And if you keep getting burned, you'll stay away. So that aspect of it bodes quite well, also, I'd say. What would you say in terms of the buyouts? What would you say about the various companies involved and how does that affect your either bullish or bearishness around them specifically, if you would. Sure. Those were three separate companies that were each bought now for $10 billion or more. And things they have in common, Krenetics was commercial stage and Nuvalent and Apogee, let's say late stage clinical.

4:25I think that bodes well just for the kind of names we own in the portfolio. But I want to stress to those listening, if you've heard me before, I say this a lot, that buyouts are the icing on the cake for me. I've been fortunate that I've been taught and learned from a lot of people way smarter than me and one of them biotech phoenix from our chat who was on the board of several companies early on he instilled in me that one of my selection criteria for stocks needs to be high strategic value to acquirers so it can be a valuable platform technology a drug in a area where there's less competition or where it's clearly better than the competition etc an example might be Syndex Pharmaceuticals, SNDX that we bought for around$9 a share.

5:10And it already had, I think it was just under nine actually, and it already had two approved drugs. So it was not a science project. We were looking at the sales growth for Revuforge in AML and Nick Timbo in graft versus host disease. 2026, 27, 28, where do we think those go? Also via label expansions. I think that's around 22 or something right now. And people keep asking for the updated game plan, expecting something exciting from me, but I'm just holding these names patiently. Like I said, they report the results, these companies once every three months. If Thesis is going in the right direction, hold patiently.

5:48That's where the big money is made. And if something comes out that shows me I'm wrong, I'll be the first person to open the mouth, insert foot, sell it and move on. But what's nice here with Syndax as an example, they have a 50-50 US split for the Nicteam Vodrug with Insight. So of course there's speculation that at some point Insight might want to buy out Syndex to bolster their hematology franchise. If that happens, great. Personally, I'd like to see where Reverforge sales go 2027 to 28 and also by then they would have, right now it's approved in the relapsed refractory setting for KMT2A and NPM1 mutation AML.

6:29So what would be nice is to see that get approved for first line as well, which is a far larger opportunity. So, you know, it's kind of, obviously there are ways to lose if the side effect profile gets worse, there's more QTC, et cetera. But if you're looking at the situation where either the company goes it alone a few years, that would be my preference. And on the other hand, if Insight buys them out early, hopefully for a sizable premium, that's always nice too to have that cash freed up to redeploy. So I hope that makes sense to those listening. And what would you say about the ETF, XBI, and any other notes to mention about ETFs when it comes to focusing on certain sectors, if you have any words of wisdom there?

7:14Oh, sure. I don't know about the wisdom, but I would say that biotech's definitely not for everybody. If you look at, in general, They say active investing in the stock market is for a minority of investors. And then biotech would be a minority of a minority because it's a very risky sector. And it's ironic that I hate risk, but I'm involved in the riskiest sector in the market. So I try to find ways to lower that risk as much as possible. So if people are wanting exposure to the sector, there's the XBI, which is more mature companies. There's also the ETF BBC, which is more clinical stage. or what some people do in our chat, if they want to have the best of both worlds, kind of like a box and win strategy where their main allocation to biotech might be in the ETF and then they own a handful of companies, maybe three to five companies outside of that so they can enjoy the fun, the learning, the due diligence of active investing, but not be trying to do too much.

8:13If you spread yourself too thin, that's where you'll get pretty frustrated. So it's nice to have a way to just dip your toes in and see whether it's for you or not. And in terms of what you're focusing on, would you remind our audience what are the metrics that you're most focused on? What are the ones that you pay most attention to? And also, I'm just interested, you said that you're averse to risk. Why indeed are you focused on biotech? As far as, I'll start with the why focused in biotech. I started investing in 2008, had nobody to teach me, made every mistake in the book. I learned lots of different strategies from lots of different people, different sectors.

8:55I think a lot of us in biotech, at least in our chat, one thing we've discussed is there's a personal angle to whether there's specific diseases that somebody in our family or friends have experienced. There's several such instances for me. And so it's nice to be involved in a sector that's churning out cures for patients or treatments that significantly better their lives. The practical part of it too, you could think of it when there's a downturn in an economy or pretty rough things happening out there macro-wise. The example I use is, let's say there's a new drug launched for brain cancer. Chances are it's going to keep selling regardless if it doesn't have much competition.

9:35And so that's kind of the way we think about biotech investing in assets and companies and drugs platform technologies that have very high strategic value. Hopefully, there's a steady stream of catalysts or events to keep me interested. And so, I definitely look for ways to de-risk that as much as possible. It could be a big pharma partnerships, making sure all the companies have a relatively strong balance sheet, insider ownership, looking at the drugs. They're mainly mid-late, late-stage especially or commercial, so higher probability of success, areas where we understand the competitive landscape very well.

10:12So one way I like to put it is if I can explain thesis for any holding very simply to my 10-year-old nephew, then I'm allowed to invest in it. And the other 95 % of the time, if I don't understand the company well or it's an indication where there's so much competition that it's beyond me, I'll be the first one to say this one's outside of my wheelhouse. As far as metrics go, win rate, looking at your realized gains losses over the last year trailing 12 months is a metric I like a lot. I think of it as a check engine or a warning light. So during the biotech bear market last time, you have to look at yourself in the mirror and know your weaknesses as an investor.

10:54And one of mine is when I do very poorly, I will overtrade. I will trade very frequently. I will write more articles, try to do more work to get myself out of that ditch. And I just end up digging myself into a deeper hole. So during the biotech bear market, my win rate went as low as 30%, I believe. And honestly, as I've told people many times, that's when I was considering shuttering the service because numbers don't lie in good times and bad. And you're either a guy who's adding a lot of value for the portfolio or you're just another writer out there. And thankfully, during that biotech bear market, we were able to, I was able to, with a lot of help from others, dial in my focus on just late stage and commercial biotech.

11:40I decided to stay away from preclinical and phase one just because my track record there was definitely poor to mediocre. I was able to lower my trade frequency. So on average, I only trade, let's say two to three days per month. And it's funny how less is more and you're just holding these high conviction companies patiently. Win rate right now over the last trailing 12 months is 92%. And for this year, year to date, it's 99%. So part of my job in the service is to keep people grounded and they help keep me grounded too. Anytime somebody's cheerleading, we like to remind each other we're not all that.

12:18And likewise, when we're at lows, if there's the next bear market or correction, it's nice to have people scoop you up off the floor and let you know that things are going to be okay and maybe give you suggestions on what to improve. I like to tell my readers that my goal is just to make 12 % per year. Again, I'm focusing on de-risking and downside cushion first. And after working our way through the bear market in 2022, the portfolio lost 40%, I believe. 2023, the portfolio gained 117 % versus basically flat for the sector. And that was the turnaround where I focused just on late stage and commercial.

13:012024 was up 14 % versus about flat for the sector. Last year was up 81%, significantly better than the sector ETF benchmarks. And this year currently we're up 58%. So it's nice that consistency compounds, you know, my old MOA, as I like to say was, I would have hot streaks and then give my gains back to the market. You know, anybody when you're doing that flash in a pan performance, you're doing well for a few months or a couple years, it's very easy for it to go to your head. And at which point you give the gains back to the market. And so I try to have that eyes wide open approach that I'm just trying to be consistent, make logical decisions one trade at a time.

13:44And if I can do that, then hopefully the results will speak for themselves. Yes. The older I get, the more I see consistency is really a key factor in almost everything that you're trying to get good at. What would you say in terms, you know, also in terms of like your returns, we were talking to Clem Chambers this week and he was saying that 25 % consistent returns is pretty much epic level in terms of what you can expect. And most of us should be, or most great ones, I shouldn't include myself among that, but most great investors should aim for between 10 % and 12%. So right in that kind of sweet spot this week in terms of voices of reason, in terms of what we should be anticipating.

14:35What other names would you put out there in terms of names to look at or names that you like and why? And the converse of that, happy to hear also if you have any. Sure. That's a good question. The problem is a lot of our holdings have run up significantly. So people know I'm not a big fan of people chasing holdings or stocks that have already run up beyond the valuation that I would suggest. Each weekly recap, so we have a weekly summary I publish, which is not only my activity and the articles I've written or research I've done, but it's also more importantly, maybe trades and other commentary from Smarter Minds in our chat.

15:19And one thing I include in the weekly summary is five companies in the portfolio that I would suggest, I especially think of new members in this, but it is a time-saving feature for everybody of what companies are the most timely in terms of spending your time and doing more due diligence. And a lot of the ones in our current, the companies I would check out section actually are buy on pullback names, meaning they've already run up some and I wouldn't recommend people chase them. So it's more about being ready for whether it could be poor news that brings them back or sell the news reactions, as I like to call them.

15:57We have Q2 reports coming up. So lots of times there can be a company where there's minor details the market doesn't like, maybe sales temporarily slow for a quarter. Maybe there's a setback in the clinic for a non-core asset, things like that, where the share price pulls back 10%, 20 % or more. And that provides you your ideal entry point. So even in the people in our chat today, who quite a few owned Krenetics. I did not, but they did, which got bought out this morning for 100 % premium. My suggestion to them when they were asking me what names to buy, I said it would be better, you know, sit in the wind, relish it, you marinate in it, enjoy it.

16:39And you shouldn't be in a rush. You know, me a few years ago, I would have been in a rush to redeploy gains versus what I tell them is, you know, slowly stock the right setups, the companies you like, see if they come back to buy points that you feel are appropriate. And the beauty of it is, you know, investing as I think it was Buffett who said it is a no strike game. So if one bus leaves without you, there will always be another one. And I like to publish a playbook for ROTY members, which is all the potential ideas I have on radar, stocks that I could buy if money frees up. And many of those run without me.

17:15And what's nice is if those run without me, there will always be other setups, other stocks. And so it's important to wait for the right pitches to swing at. One we still own that hasn't run up yet is Journey Medical Derm. It's trading out around, last time I checked,$200 million enterprise value. And they have a drug named Imrosi for rosacea. And what I like, part of my selection criteria is long-lived intellectual property. You could have a great drug in biotech, but if Composition of Matter patents run out in three years, then that revenue is going to die. And in Rosie, they have Orange Book patents to 2039.

17:58That gives them a long runway. If you conservatively say sales are going to be$200 million, that's about one times the current enterprise value. and a sweet spot in our portfolio has been buying companies at one to 1.5 times enterprise value and then from there obviously as the market gets more optimistic on sales prospects that multiple can expand significantly journey had a prior derm a gap down you can see it in the chart where it went down to what was it five and change and we doubled down there bought more and what's nice is it was again reckon a good example of those sell the news reactions where they had temporary setbacks, waiting for payers to get on track with a new drug, reimbursement to get in place, formulary wins.

18:46All of these things are temporary. So who knows, maybe there's more sell the news in Q2. Again, I'm not looking at near term. I'm looking more at where the sales are going 2027 to 2028 and beyond. And what's nice is this is not a me too drug. They have head to head data showing superiority versus current standard of care or ratio. Three quarters of practitioners surveyed said they were likely to prescribe, obviously take those results with a grain of salt. But it is nice that now that they have a lot of the heavy lifting out of the way, the second half of this year in 2027 should be more about formulary wins, hopefully getting in rosy on the treatment guidelines and looking at the sales growth from there.

19:33So it's a pretty plain vanilla, almost unexcited, and you could call it a boringly profitable setup. But that also is part of my approach. I would love to be boringly profitable as opposed to all the highs and lows of swing trading in my 20s and 30s. I'm here at age 40 and it's been nicely the last four years. I share with our subscribers both a model portfolio and I also share them screenshots of the metrics from my actual account. And currently it's showing, again, to reiterate, the goal is to have 12 % annualized return per year. And right now it's showing 85%. So I want to stress that's very abnormal.

20:17That's not going to last. And obviously people who are joining the sector at highs should expect different results. Uh, what's nice. Somebody told me recently when they joined is they understand that they're looking at the system, the process of my way of doing things over a multi-year timeframe, because the wrong way to join is to join and just looking for, you know, I get questions sometimes from people saying, what's going to be the next one to run, you know, what's the next big winner. And that's not how we operate personally, especially for me, I'm looking at that multi-year timeframe, sales growth, uh, pipeline momentum.

20:53Um, and so So it's something that, you know, if you have flash in the pan performance, you're one and done. You'll make some money, hopefully keep it. Maybe you'll give it back. For us, the goal is, you know, to be able to reproduce replicability of a strategy, a strategy where you can keep using the same playbook over and over and being as boringly profitable as possible, if that makes sense. Sure does. Anything that you would say that has changed for you in recent years or a change in strategy that you would note? Anything beyond what you've already noted? I think we highlighted, touched on the most of it.

21:30It is interesting with ROTY. I like to say for our membership, it's quality over quantity. So for me, we're sitting here at about 500 members. The last biotech high, you know, when the sector peaked in 2021, we had 800 members. And what I like here is I feel like the quality of the group has gotten a lot better over time. We have a lot of doctors of various specialties, money managers, analysts. And I also love that we have quite a few newbies who have joined. And it's nice that when somebody who's new asks a question, there's usually a lot of other people that have the same question, but maybe are afraid of voicing it.

22:08So each month, if I add a couple of new people here and there to the group, that makes the overall quality better. That's a nice place for us to be in. And I think people in the community, they like that and appreciate that, too, because of the quality of our conversations and discussions. We had a number of different channels and chat. It was all an experiment. And as I like to say, you know, you throw things at the wall and see what sticks, what helps the most. And so the channels we're left with now are more focused, but they add much more value. We have the Top 5 Holdings channel where members share their top five holdings stocks and why they own them.

22:45And it's nice that we step on each other's toes, but in a respectful way, playing devil's advocate for each holding as opposed to being in an echo chamber where everybody's a yes man and tells you what you want to hear. We also have a real-time trades channel where people share what they're buying and selling in real time. Um, so I feel like the way that I've run the service is been gearing toward that direction of quality over quantity. And that also, uh, is reflected in the post, you know, um, some weeks that I might have some new trades for everybody or new playbooks, new ideas. And, you know, recently we've had three weeks in a row where the only thing I published was the weekly summary, you know, the parts of our chat that I thought were the most, uh, important discussions we've had.

23:30I update what holdings I think are the most timely news for our holdings. But otherwise, I don't publish fluff just for the sake of having something out there. I think it's been a month and a half since my last trades. And so one of the questions I get from people is, when's the next one? When are you going to pull the trigger? This one's running without you. This one's running without you. And personally, I like to only pull the trigger when I have as many factors in my favor as possible when I have money that's freed up, maybe let's say from taking profits in a name or taking a loss and moving on.

24:05So it's a good position to be in when you're not forced to be making trades, but you're waiting for the right pitches to swing at. So I think people understand that those who subscribe to the service, they appreciate that it's, you know, something's only going to be sent their way, an alert in their inbox, et cetera, when we feel it adds something of value for them. And I think that's kind of what the whole community is about. Do you have a motto? I've been asking people lately in these conversations if they have a motto, either in investing or in life. You may have just said it with a couple of things you mentioned, but do you have one?

24:41That's a great question. The boringly profitable one is part of it. The other, there's a verse I like in the Bible. That's Proverbs 21, 31. The horse is made ready for the day of battle, but the victory belongs to the Lord. And what I like about that is I think it was one of the major investors, maybe it was Buffett or Munger, whoever, where they talked about over-preparing. And so I feel like early in my investing career, I shot a lot from the hip. I didn't do well at preparing. And now I do the opposite where I try to put as much effort in the front end as possible. An example of that is Playbook again, where it started as a list on my phone where much like with chess, you're trying to plan your next five moves ahead of time.

25:22and on the phone. And now I publish this as a monthly or every other month post. I'll share what ideas I have on radar, a possible thesis for each in my research. And what's nice about that is if money frees up tomorrow, whether one of our companies is bought out or maybe something reports bad news and I sell it for a loss, I already know that which setups I'm most likely to rotate that dollar into. So I try to over-prepare, But it's nice knowing the results aren't completely up to me in that sense. And then if you have anything else, I'm happy to hear like a value for for our audience right now.

26:01I also had a question. I have a somewhat dormant, somewhat active cannabis investing podcast. Just curious, especially with talk of rescheduling on the medical side of cannabis, anything to note on the psychedelic side of things or cannabis side of things that you would mention as it as it. overlaps with the biotech side? That's a great question. Currently, I don't own any cannabis companies in the portfolio. Before, there was GWPH, which had the Epidiolex for epilepsy, and that was a pretty big buyout. I know some of the guys in our chat right now, they like CMPS, which again is Compass, I believe, Pharmaceutical or Compass Pathways, which is But that's more on the mushroom side of things, psilocybin for treatment-resistant depression.

26:56So they have a phase three results already in hand, showing pretty good data, durable and treatment-resistant depression. And I believe they have NDA submission in Q4, 2026. So I can't say I've looked at it. Some guys in chat, that's one of their top holdings. But it is nice that psychedelics the role they're playing in depression, PTSD, PTSD and other indications. And it seems right now they have a tailwind from the current administration. The Trump administration seems to be quite friendly toward the psychedelic theme. So that's definitely a sandbox I should be learning more about. But unfortunately, I don't really have much to say at the moment on that.

27:38Anything else that you would add to this conversation for our audience? One that I would highlight and I tell people, it's funny when I'm traveling, I'm here in Medellin at the moment, and I do run into a lot of people that are interested in biotech. And, you know, one thing, like I told you, is I try to stress to people that it's not for the majority, but for the people who are interested in it. We, you know, it's our, it's our passion. We really love the sector and what it does for patients. And when I started out investing in 2008, I learned from a lot of different services, a lot of different experts.