Investing in biopharma stocks isn't for everyone. Between the need to comprehend subtle medical or scientific factors to the often Byzantine world of clinical and regulatory catalysts, there is an abundance of opportunities for informed investors to reap big rewards -- and for misinformed or underinformed investors to lose their shirts.
The good news is that if you're willing to put in a bit of effort, it's very possible to improve on your process to secure better results with this category of stocks. In particular, there are three things to pay attention to that'll give you a lot of juice for the squeeze, so let's dive in and learn.
1. The board of directors
As stuffy as it may sound, taking a look at a company's board of directors is at least as important when you're evaluating biopharma stocks as it is with other investments.
Take AbbVie's (NYSE: ABBV) board, for example. There, you'll find the current CEO, the most recent former CEO (who is also the chairman), 10 individuals who are either current or former captains of industry in major businesses both inside and outside of the healthcare sector, and a pair of professors of medicine from leading educational institutions. You'll also find the committee assignments for each of them.
It's true that evaluating the quality of a company's board is a somewhat subjective process. But it doesn't take much work to figure out whether the board members could credibly be useful advisors to the CEO and other top executives.
In AbbVie's case, the fact that a former CEO is chairman of the board is a big plus, as it means all of his experience and knowledge is retained and available for use as needed. Similarly, having a pair of prestigious professors at the CEO's disposal is a smart way to try to maintain ties with the academic medical and scientific communities, both of which AbbVie must successfully court to succeed in the long term.
2. The scientific advisory board or scientific committee
Another governance factor that's worth understanding is the composition of a company's scientific advisory board (SAB) or its scientific committee on the board of directors.
While there are a few differences between those two concepts -- scientific advisory boards do not have any actual control over the business' functions, and typically do not participate in any day-to-day work, unlike members of a science and technology board committee -- the principle used to analyze them is the same.
Much like with evaluating the board of directors, the idea is to think about the members of these groups and what they bring to the table relative to what is needed. For instance, Moderna's science and technology board committee is tasked with advising the rest of the board about the capabilities of its platform technologies. It's staffed with three doctors who each held senior leadership positions in major organizations that you might kno.
In other words, they're doubtlessly well-equipped to provide insightful commentary regarding Moderna's science and technology as they relate to the competitive landscape it operates in. A lesser board would probably include less qualified individuals, or individuals with fewer directly relevant qualifications.
For a pre-product biotech, the best SABs are staffed with the leading researchers in the field of science that's the company's focus for research and development (R&D). It can be hard for a layman to determine who's considered a leader, but the next point will help to clarify the issue a bit.
3. The volume and prestige of the staff's scientific publications (or lack thereof)
Especially for early-stage biopharma businesses, building up a science-based argument for why the company's approach is likely to result in successfully commercializing a medicine is absolutely mission critical. Publishing the results of clinical trials in reputable and peer-reviewed journals is one of the main ways that biopharmas advance their side of the argument.
Like most biotechs, Zealand Pharma (OTC: ZLDP.F) has a section on its website devoted to collecting its scientific publications and key presentations to the scientific community. What you want to see is largely what Zealand is displaying: a new publication or a new formal presentation of data at a medical conference once every couple of months or so.
You don't need to read these materials if you don't have the background to appreciate them, though it's often interesting. Take note of who's listed as the author; a quick search on the internet will reveal their institutional affiliations and, with a little effort, it's possible to discern their level of credibility on a basic level.
Look at where the data were presented or in which journal the paper was published. You probably already recognize the names of the most reputable journals, like Nature, The Lancet, or the Journal of the American Medical Association (JAMA). If you're not sure about how reputable a given publication is, try looking up its impact score; higher is better.
The point here is that if a biotech is repeatedly publishing its results in My Friend Jerry's (Fake) Medical Journal for Imaginary Medicine or The Journal of Weird and Probably False Science, or presenting its results at a conference dedicated to the practitioners of medical charlatanry, it probably isn't producing data that the most reputable segments of the scientific community would find to be valid or compelling.
These examples, while fantastical, are not very far from reality; be especially alert for any signs of a financial relationship between a business and where it publishes or presents its data, as it's a major red flag.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Moderna. The Motley Fool has a disclosure policy.
