Making money in biotech stocks

0:10Jonathan Faison:Jonathan Faison from ROTY, Biotech Community, Unseeking Alpha. That's the investing group you run. Jonathan, welcome back to Investing Experts. Hey, thank you, Raina. I appreciate being here. Yeah, it's great to have you. I'd love to get a brief refresher from you on how you invest in the biotech space, what your portfolio may look like, what you're a brief refresher on your strategy for those that missed or forgot your episode from last year, and then how you would encourage investors to think about the biotech space right now. So I started writing on Seeking Alpha in 2015, 2016. Definitely didn't think it would be turning into the community we have now over close to 500 biotech investors.

0:54Whether it's analysts, doctors of various specialties, it's nice we all contribute our ideas together. As well, as far as the portfolio goes, I can speak to the current snapshot that it's around 85 % commercial stage and 15 % clinical. In general, I like to say I started investing in 2008 and I didn't have a background in biotech, so I had to make up with discipline what I lack in knowledge. And so that involves position sizing rules. For example, the maximum I'm allowed to hold in a commercial stage company is 10 % of the portfolio in that one company. And for clinical stage, the maximum is 5 % of the portfolio.

1:35I tend to trade only a few times per month. In general, I found less is more. So I trade two to four days per month. And the rest of the time, I'm writing down my ideas, doing my research, trying to figure out where I got it wrong. So that's nice. That helps me a lot personally. One of my weaknesses is FOMO, fear of missing out or over-trading, especially if I have a rough patch, I'll over-trade to try to make the money back. And so one reason we've had three pretty profitable years in a row, again, just compounding gains, trying to be boringly profitable, is because of that slowing down and focusing on quality.

2:08So that's where we are now. And again, looking at a multi-year time frame. So a lot of these companies you're looking at, where is the sales going to go 2025, 26, 27, as well as the pipeline, clinical momentum, readouts, et cetera.

2:22Jonathan Faison:I appreciate that. That 500 members, I didn't realize it was so big. In terms of the feedback you're getting from subscribers, does that help you navigate additions or deletions to make to your strategy? Or has it been the reverse? Have you stuck pretty steady with that vision and just incorporated new subscribers based on its success? Great question. Not to pick on anybody, but I think on X, what you see a lot of times on social media, X Twitter, where a lot of the biotech community is, sometimes people can mute, block people who disagree with them. And I actually do the opposite. I really like it when people step all over my thesis, tell me where I got it wrong.

3:02And so that's an environment we try to have in chat in a respectful way. There's guys on there that are way smarter than I'll ever be, like guys who've worked with the FDA for decades on end or guys from different specialties. So if I'm invested in a cancer company or dermatology or whatever, and a doctor is saying, hey, this is how I use it in my practice, Jonathan, and it's not the same as what you're saying in your article, it's nice that we step on each other's toes. People tell me maybe where the stock, the valuation has gotten ahead of itself or they bring up picks that maybe I wasn't aware of.

3:32I think every biotech investor, something that resonates with us is going through high periods where you're red hot and feel like nothing can touch you. You feel untouchable. And then you go through low periods where you're like, I don't got this. I can't keep going. I give up. And I can think of at least four times where you're in the fetal position. You're like, I can't do this anymore. And then some people in the community who've been doing this for 30 years plus or other guys who've been there and done that. They picked me up off the floor, tell me how I can improve, how to change my rules.

4:01That's where we learned exercises. Like one analyst taught me the portfolio cage match exercise where I take a current stock I own and I compare it to a stock on my radar that I'm thinking about buying and I compare the attributes, the future upside, the risk involved, the management team, et cetera, and the winner of this cage match. Think of it like MMA or something. The winner is the one that stays in the portfolio. Other guys helped me come up with my pre-trade questions. So there's seven questions that I publish in each trade post that I have to answer before I'm allowed to make a trade. So I think that's the big thing about the community is I try to contribute as much as possible, but it's obvious to anybody there that I get as much or probably more from them than they get from me in that sense.

4:47And it's nice that we all try to help each other out. So when you're riding at highs, it's really nice to have somebody bring you down, keep your ego in check, And when you're at Lowe's, it's nice to have people to encourage you and help you keep going. So it's a group effort. You saw Unicure, Q-U-R-E, the gene therapy stock for Huntington's disease, rise a crazy amount after the recent data and also being aligned with the FDA. And while I'm not invested in it, what I love is how that brings a lot of generalists, a lot of people who normally wouldn't care about the sector, their eyes are there and like, wow, there's a cure or at least something that's helping these patients live a much longer, higher quality of life.

5:24And I think the more types of clinical wins we have like that, whether in Alzheimer's or Parkinson's, which is near and dear to me, schizophrenia, et cetera, it's just this halo effect that brings more dollars, more investors back to biotech.

5:36Jonathan Faison:And what are you seeing in the coming months, the coming years come out from that space? Oh, there's a lot of ways to, pardon the phrase, but skin a cat, in this case, make money in biotech. There's people who focus on certain themes like gene editing. There's people who focus on, you know, dumpster diving. They'll find these companies that are trading at negative enterprise value, you know, below the value of their cash. There's been some pretty big binary winners of late where people are, especially specialists who are able to read the data ahead of time, you know, the last round of data and see inferred to the probability of success of the phase two or phase three readout coming up.

6:13And the people who get it right make a lot of money, even though those are events where you can lose, let's say, 80 percent or 90 percent of your money if you're wrong. So you have to size your bets accordingly. Imagine whatever percentage of your portfolio you're exposing to that biotech stock. Imagine the worst case scenario of losing 80 or 90 percent of your money. And would you be OK with that and size accordingly? In my case, again, I try to be boringly profitable. So I try to focus on themes where there's a lot of tailwinds in the rare disease space. Right now, there's a lot of evidence that the FDA is being very friendly in terms of regulatory endpoints, letting companies run single arm studies where appropriate, it because it's a lot harder and maybe unethical in some cases to do placebo-controlled studies.

6:56So rare disease is a great place for us to hunt into. In my case, I always tell investors, you need to look at your, this is why you need to keep a trade log, is look at your losers, your winners, where are you winning and why, and try to replicate that. And where are you losing and why, and try to avoid that. In my case, my track record is pretty poor when it comes to preclinical or phase one biotech. So I learned the hard way. For me, my sweet spot is working and focusing on late stage biotech, phase two or three companies, clear path to market. I don't like science projects where you're just throwing things at a wall, indications, hoping something sticks, BLA filing stage, and a lot of commercial as well.

7:38Another area that's near and dear to me is biotech companies on the cusp of becoming growth stocks. What I mean is a lot of these growth investors who are non-biotech specialists. They typically steer clear of the biotech sector, but when they do find a biotech company that already has the drug approved, so there's not the regulatory risk, the cash burn rate is reasonable. It looks like there's a path to profitability, or maybe they're already profitable or close to it. And the sales are ramping up in a large market. Those are kind of the sweet spots. If you can see those, whether a few quarters or a couple of years ahead of time and get into those.

8:14It's pretty fun as they become more broadly appealing to these investors outside of the sector. A recent example was our Qtis, ARQT, that we entered around the sevens. And now it's around 20, I believe. And they had Zoriv, their cream. It was approved for psoriasis first, then sebderm. Then it was approved for atopic dermatitis and then recently, or not recently, but more recently, scalp and body dermatitis. Now they're expanding to other indications as well. And it's just one of those stories where the company's becoming profitable, the sales are ramping. We recently sold it for a nice profit to move into other undervalued setups, but that's been a blueprint from the playbook that we've been repeating a lot is trying to find these companies in the early stage of their growth cycle, but with as much of the risk off the table as possible, whether it's the drugs already approved or the phase three data set is already highly compelling, things like that.

9:12Jonathan Faison:What else would you say about the risk part of things? I know it's a risky sector. How else would you encourage investors to think about the risk part of things? You have to know yourself. I say in my 20s, I did a lot of swing trading in biotech, binaries, binary readouts, etc. And you have, you know, it's fun to wake up to a stock tripling on the data, and you feel like the man, but you also have to be okay with the fact that, you know, you're going to wake up and if you got the readout wrong, and let's say the company that doesn't have other assets, or their assets are preclinical, so it's probably going to trade not only at cash value, but all the way down to below cash.

9:52So these companies, when that happens, and there's a negative readout, they can lose 80 or 90 % of their value. And so the problem that I hate seeing out there is when, I hate to say retail investors, because I am one too, but people who maybe who have less experience, and they put way more of their portfolio, or they go all in, heaven forbid, and they wake up to one of those losses. And that's why it's so important to be like, okay, I have 3 % of my portfolio exposed to this company. So if it ends up being a 10 bagger, that's great, it will become 30%. And if, you know, worst case scenario, I lose all of it, that's going to be only 3 % of my portfolio that I lose, and I'm going to live and fight another day.

10:29One fund manager put it as your goal is to build as resilient a portfolio as possible, and not only your portfolio, but your lifestyle. So you'll be able to stand firm in the middle of any gut punches or negative events that come your way. And I think that goes double for biotech as far as managing risk.

10:45Jonathan Faison:Anything else to say about recent trades or some of the names that you like or that you would avoid for that matter? I'll give an example with Syndax Pharmaceuticals, which is still our top holding, I believe. It's risen since, I think we're sitting around a 60 % gain, but we got in around$9. And it was a simple story too, where they have their lead menin inhibitor, Revalforge, which was approved in KMT2A AML, a subset of AML patients. And they have 50-50 US rights partnered with Insight for their other drug. I'm trying to remember the name, but it's in graft versus host disease, is Nick Timbo.

11:26And it's already nice that both of those launches are fast out of the gate, doing quite well. And the news came out recently in their Q2 report that the treatment duration for Revuforge was prior expected to be three to six months for these patients. And the thesis strengthened because now the company is saying the duration of therapy will be six to 12 months, so much longer than anticipated. And not only that, but a survey showed that most of the doctors after a stem cell transplant intend to put their patients back on Revuforge, and that'll be even longer treatment time in the maintenance setting.

12:02And so that's a great example of thesis has strengthened. And, you know, with that blank slate mentality, I look at the stock, the present risk reward, and that's why we haven't taken any partial profits because we're looking at it right now. And where are the sales going 2026, 2027 as they expand into other indications? They already recently were listed in the NCCN guidelines for the NPM1 patient opportunity, which is even larger than KMT2A. And that PDUFA date should be coming up. And so if they get formal approval there, they have two indications and so on and so forth. So it's funny. People will ask me, what's the updated trade plan there?

12:41And majority of the time, for my end, it's holding patiently. That's where the big money is made. But if valuation, if the stock goes up to 25 or 30 and valuation gets ahead of itself, that's typically where I at least take partial profits. But again, there's quite a few setups out there like that that I think are still being overlooked. Right now, it feels like a lot of investors and traders are chasing binaries, these smaller companies. And as a result, some of these commercial stage companies are actually in pretty attractive territory.

13:11Jonathan Faison:Are you paying a lot of attention to what's happening in terms of President Trump talking about various things that may affect the biotech sector, like the visa situation, price cuts in drugs? Is that something that you pay a lot of attention to? It's been nice in chat that guys who actually have worked with the FDA are able to provide more insight on that than I can. So I look to them. But in general, I try to, you know, there's top down investors looking at, you know, the sector, the macro, et cetera. And I tend to be bottom up. So I'm looking at each story and, you know, where are the sales going?

13:49Where's the pipeline going? So that tends to be a bit of a lesser concern for me. Don't get me wrong. I love tailwinds for the sector, hate headwinds. you know, when it's harder to make money when you're swimming upstream, it is possible, but it's harder. So it'd be nice to have these factors, including regulatory and legislative, and of course, the rhetoric coming from the president to be in our favor. It does sound like the administration wants to rack up more wins, especially in the rare disease space. And so that's one thing that's nice, too, is seeing a lot of these companies able to design very efficient trials that burn less cash, get them to market faster.

14:27So I've been appreciative on that front.

14:30Jonathan Faison:Anything that you're willing to share with us about what the former FDA players have shared with you? There's one guy, Osmium Research, who he worked a medical device, and he's very, very, how do I put it pleasantly? He's very, very critical of the agency. He feels like sometimes it's easier to get a drug approved in Europe than it is in the US. And he talks about examples he used, Iovance and a few others, where whether it was an essay or other manufacturing concerns that he felt should have been where a drug was given a complete response letter that should have been approved and maybe with observations of what needs to be fixed before launch.

15:08So he's definitely very critical of drugs that should have been improved, of the process, drugs that should have been approved that weren't where extra trials were required. So I think one thing I learned from him on the whole is just not to underestimate regulatory risk, even something like a cur oncology, which we own now, that was a run up play for us. It's around 7 % of the portfolio KURA, but same thing, they have a Pidufidate coming up, they would be the second Menin inhibitor approved for, in this case, NPM1 mutated AML. And same thing, you never know if there's going to be some hidden surprise on manufacturing or you name it.

15:48So again, that's where a proper portfolio weighting position sizing takes place. You always plan for the unexpected just in case.

15:55Jonathan Faison:The biotech space within small caps, you know, people talk of rate cuts and how they benefit small caps. We've seen a bit of a downtrend in that space. What would you say about biotechs within the small cap space? And maybe if you have anything to say about small caps in general right now. I'm definitely not a macro guy as far as having a crystal ball. But one thing that's kind of been obvious and talked about lately is a lot of the other sectors in small cap land or tech have been pretty overheated. And even though biotech has been pretty frothy lately, if you zoom out and compare to the 2021 XBI chart, I don't have it in front of me, but you're still down something like 40 % from highs.

16:38And so I think there's going to be a lot of this trade of going from areas of the market like AI, et cetera, that are overheated. And some people are moving those dollars to biotech saying, hey, this is going to catch up. So I can't tell you from my end, crystal ball wise, whether whether that's going to continue happening. But it's been nice to be a beneficiary of that. And again, as we talked about earlier, biotech tends to move in cycles. So if we've had a four year down cycle, it would make sense if we have a multi-year upswing as well.

17:05Jonathan Faison:Anything else that you feel worthy of sharing with investors right now looking at the space or interested in the space? I'm trying to think of which names would be appropriate. And maybe an example would be Geron Corporation, G-E-R-N, which is a company I never thought I would enter. But in the past, they had poor management. They diluted their shareholders into oblivion. And then I looked at the stock recently, listened to KOL calls. And you had the market capitalization, GERN of around 900 million. And that puts what the enterprise value is getting closer to, I forget if it's around 500 million.

17:42They have Rytelo, which is approved in MDS, blood cancer. And it's a very novel mechanism, a telomerase inhibitor. And they have some gnarly side effect profile on the drug, but it's actually most of the adverse events clear in the early days or weeks of treatment. And what's nice is it applies to us. It works especially well on RS negative patients, which are two thirds of the overall population. And even though there are other better drugs out there that have been approved, that have moved to first line, you know, these patients, whether there's 10 % of them getting this first line, or most of them get it second or third, eventually, they're going to get on this drug.

18:22And so this is kind of our bread and butter setup where you you're buying a company, you're buying a stock at around the enterprise value is is one times very conservative peak sales. So peak sales for the drug is, let's say, 500 million. Hopefully, you're finding yourself in a situation here at around$1.40 share price of heads, when big, if the company, if sales pick up from here, 2026, 2027, and tails, hopefully the loss would be manageable. And they have a readout coming up in myelofibrosis, enough that I don't give any credit to. And all the competitors there have just tried to show a benefit on spleen volume and symptoms.

19:03And they would be the first company trying to actually use ambitious overall survival endpoint, trying to show a benefit in overall survival. So it's a riskier in that sense. But if and again, that's a big if caveat, they are able to prove that that would be a big upside driver as well. But again, what's nice is we don't need that to work to do well on the stock. So that's just an example of of these companies we find at lows that are kind of thrown out and are discarded by investors or out of favor. The company had Q1 seasonality, I think, and also the sales, the launch out of the gate. You wouldn't describe it as ugly, but it hasn't been a good launch either.

19:41It takes time to build a physician awareness and physicians need time to try the drug, get acquainted, gets comfortable with the side effect profile. And from what I've noticed in the trends with physician awareness, that's getting better over time, willingness to prescribe. And I think the bet is at least currently 9 % of the portfolio that that will translate into sales growth 2026 to 2027. In full context, we're slightly in the red there. We're still only like 5 % in the red there. So just so people know where the position is, full disclosure.

20:17Jonathan Faison:Your investing group, once again, is ROTY Biotech Community. Happy for you to have the last words or share where else investors can get in touch with you or hear from you. Oh, sure. The nice thing I like saying about these communities on Seeking Alpha and not just my own is when I started investing, I had nobody to teach me. Invested my life savings, lost half of it, took out a big loan, lost most of that too. I learned everything the hard way. And so I paid for a lot of services too. And what's nice, like with ROTY Biotech community, there's a free trial for two weeks. So I love telling people, you know, kick the tires for two weeks, copy my portfolio, my thesis for each holding, read our discussions and chat.

20:57And, you know, if times are tough or you're not wanting to spend for a service right now, completely get that. At least you're able to use those two weeks, copy anything that helps you, including my rules. I have all of my not only my winners there, but also my worst losers posted and what I learned from them. So hopefully you can learn from those versus doing them yourself. And that's what these services are there for, you know, to help accelerate your learning curve. versus doing it the hard way like I did. Just a reminder, anything you hear on this podcast should not be considered investment advice.

21:27This is for entertainment purposes only, and you should seek advice from a licensed professional before investing. If you enjoyed the episode, leave a rating or review on your favorite podcasting app, and we'll see you soon with a new episode.