CLASSES TO GO!

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CLASSES TO GO!

• Investing In Biotech
  High Risk Or High Reward?

Cy Lynch, Manifest Investing
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Disclaimer

• The information in this presentation is for
  educational purposes only and is not intended to
  be a recommendation to purchase or sell any of
  the stocks, mutual funds, or other securities
  that may be referenced. The securities of
  companies referenced or featured in the seminar
  materials are for illustrative purposes only and
  are not to be considered endorsed or recommended
  for purchase or sale by BetterInvesting National
  Association of Investors Corporation (BI) or
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  expressed are those of the instructors,
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  case may be, and do not necessarily represent
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  investment decision.
• Securities discussed may be held by the
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Biotech Companies Defined

• Generally businesses applying technologies
  (genetic engineering, recombinant DNA techniques
  and the like) to
• Identify targets for drug development
• Transform biological systems into useful
  processes and products
• Many are small companies with no current product,
  but hoping to come up with a blockbuster

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Challenges Of Investing In Biotech

• Requires knowledge of drug approval process and
  perhaps specialized knowledge of industry
• Can be speculative, not unlike the lottery
  (especially with small companies)
• Great reward if youre lucky or right
• Great risk of failure you could lose it all!

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Tiers Of Biotech Companies

1. Established and large with one or more successful
   products on the market
2. Those close to profitability with growing sales
   from drugs on the market or potential big sellers
   in late-stage clinical trials
3. The rest, just having products still in the
   discovery or clinical stages

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Qualities Of Investment-Worthy Biotechs

1. Successful products on the market
2. A deep product pipeline with late-stage
   candidates
3. Drugs and candidates that target large or
   underserved markets
4. Partnerships marketing agreements with
   blue-chip drug companies
5. Research development spending
6. Enough cash to fund operations for at least two
   years
7. Experienced management
8. Favorable prospects and value based on your study

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Pharmaceutical Approval Process

• Pre-Clinical 4 to 5 years
• Phase I 18 months
• Phase II 2 years
• Phase III 3 to 4 years
• Marketing approval by the FDA 1 to 2 years

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Pre-Clinical Stage

• Typically involves years of testing on animals
  and human cells
• Successful results lead to Investigational New
  Drug (IND) application to FDA

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Phase I Clinical Testing

• Typically takes several months
• Involves testing in small number (20-100) of
  healthy humans
• Primary concern is safety
• Also determines how is drug absorbed, metabolized
  excreted
• Must be reasonably safe
• About 70 of drugs pass

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Phase II Clinical Testing

• Takes several months to two years
• Most involve randomized trials on up to several
  hundred people in two groups
• Patients receiving experimental drug
• Control group receiving standard treatment or
  placebo
• Often blinded
• Seeks comparative data on relative safety and
  effectiveness of new drug
• About one-third pass first two phases

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Phase III Clinical Testing

• Typically lasts several years
• Expensive, large-scale testing in several hundred
  to thousands of patients
• Usually randomized and blinded
• Seeks more thorough understanding of
  effectiveness, benefits and range of possible
  adverse reactions
• 70-90 of drugs completing Phases I II
  successfully complete this phase
• Company can then request FDA approval for
  marketing the drug (New Drug Application NDA)

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NDA Submittal To FDA

• Lengthy documentation
• FDA action
• Approval
• Denial of application
• Sends the company back for more study or data

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Phase IV Clinical Testing

• Comes after FDA grants NDA and drug is on the
  market
• Can be voluntary or required in conditional
  approval
• Potential objectives
• Comparisons with existing drugs
• Monitor long-term effectiveness and impact on
  quality of life
• Cost effectiveness relative to other therapies

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Summary New Medicines Timeline
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Six Foolish Commandments of Biotech Investing

• Authors (Brian Lawler, Motley Fool contributor)
  disclaimers
• This isnt a complete list of Biotech
  Commandments
• While the bad characteristics mentioned arent
  necessarily an investment time bomb waiting to
  explode, they indicate more risk than for the
  average biotech.

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Biotech Commandment I

• Drugs that fail their primary endpoints in
  clinical trials, yet still get submitted to the
  FDA , usually do not get approved.

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Biotech Commandment II

• Biotech companies located on Pink Sheets,
  over-the-counter exchanges or even the American
  Stock Exchange often make bad investments.

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Biotech Commandment III

• Expect volatility in the share price of biotech
  stocks whose companies don't have revenues or
  approved drugs.

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Biotech Commandment IV

• Drugs formulated to treat certain types of
  diseases have a much harder time gaining
  regulatory approval than do other drugs.

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Biotech Commandment V

• As a clinical trial's size and length increase,
  so do the complexity and probability that
  something may go wrong.

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Biotech Commandment VI

• Stay away from unproven technologies. You have no
  idea whether the tech even works in people, let
  alone the specific drug you're investing in.

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Summary

• Biotech can be rewarding but carries high risk of
  volatility and capital loss
• All but the most aggressive investor should
  concentrate on established, Tier 1 biotech
  companies
• When considering Tier 2 companies
• Acquire knowledge of the bio/chemical nature of
  the just approved, or late phase developmental,
  drug(s), its potential market and competition
• Understanding of where developmental drugs are in
  the approval process
• Avoid the rest (Tier 3) with just stories
  dreams

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Sources

• Ashton, Zeke, A Foolish Checklist for Biotech
  Investing, June 13, 2000 www.fool.com/research/200
  0/foolsden000613.htm
• Lawler, Brian, The Commandments of Biotech
  Investing, August 28, 2006 http//www.fool.com/inv
  esting/high-growth/2006/08/28/the-commandments-of-
  biotech-investing.aspx
• Feuerstein, Adam, Biotech 101 The Road to FDA
  Approval, July 5, 2004 www.thestreet.com/story/10
  169168/1/biotech-101-the-road-to-fda-approval.html

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