Healthcare development progress forecasts
This article rewards investors who choose to direct their investments of TIME and capital to those securities with the highest likelihood of successful rates of return among alternatives compared under identical important measures.
Readers familiar with our work may want to skip to the Comparing Details heading below.
What we all need to know:
- Which have the best trade-offs between forecast-able reward and risk?
- How big a reward is realistic to expect? Why?
- How often may disappointment occur?
- How much time and capital may disappointment involve?
- How frequently may the rewards expected be compounded?
- What alternative choices are available?
These are questions not often either asked or answered by many investment analysis reports. The commonplace approach is to present those aspects of one investment which may set it apart from others, but fail to make the essential decision-supporting step of comparing alternatives on an equal-measure basis.
If your thoughts about comparative values lead to P/E ratios, do you really believe in the ability of "generally acceptable accounting practices" to make useful future value comparisons?
Do you really believe that multi-year, competitive share-of-market forecasts can be made in today’s rapidly advancing technology environment without error provisions - provisions carried forward into the G of P/EG value assertions?
Instead, look to demonstrated human-nature behavior of self-protection. “When the oxygen masks come down, be sure to put yours in place before attempting to help others”.
That is the perpetual work environment of investing Market-Makers [MMs] whose role is to aid buyers and sellers in finding a point of price balance right now in multi-million-dollar block trades. A balance which usually requires them to put a part of their own firm’s capital temporarily at the risk of changing market attitudes and prices.
They won’t do it without the oxygen of price-change protection. That insurance comes from separate hedging deals in derivative securities where the operating leverage of the limited-life legal contracts involved makes deals practical.
What must be paid for the protection, and the way it is provided tells just how far those insurance buyers and sellers (sufficiently) in the know realistically expect prices may go. They all have real-money bets being made. The price range forecasts are over time periods defined by the contract lives of the involved derivatives.
Such forecasts are constantly being refined every moment investment markets are operating, and are made part of every market-day’s closing records. They provide an historical record (in subsequent market price actions) of how well the “smart money” can make useful forecasts – for specific stocks, ETFs, and indexes.
Here are current MM forecasts for 76 biotech stocks
This map locates securities at the intersection of prospective price gains (green horizontal scale) and potential price drawdowns (red vertical scale). Locations are based on market-maker hedging behavior to protect their necessary endangerment of firm capital as they enable volume trades. Desirable map conditions are down and to the right.
The severe limits of the tradeoff proposition deny much of any reasoning to answer the question of WHY we see what we do. To probe that exploration further, we offer some history of what has been seen in the market movements of many of these securities when tradeoffs similar to today’s have been seen in the past five years. Please consider Figure 2.
The Reward~Risk dimensions of Figure 1 are shown here in the upside price change prospects of column [E]. It in turn are the differences between [D] and [B]. All come from the currently inferred expectations of MMs, based on their self-protective hedging actions.
The downside exposures are, as a result of experience, based on worst-case interim price drawdowns [F] as the investor seeks to achieve sell targets. Those exposures may be held until profitable recovery occurs, but are noted since they mark the most emotional strain likely to cause the investor to give up hope, accepting the loss in fear of an even worse outcome.
Instead, we advocate a time-limited (to three months) holding period to seek the gain target and pocket the profit as soon as it appears. If not happening 63 market days after the forecast and position entry, then that position is closed out, regardless of gain or loss, to be reinvested in another appealing subject. This standard portfolio management discipline is known as TERMD, the Time-Efficient Risk Management Discipline.
Positions from prior forecasts are tracked when their forecast Range Index [RI] equaled that of the current forecast as to upside and downside prospects any times in the past five year of daily forecasts. That sample of history is shown in [L] and [M] for RIs of [G]. The RI value is that % proportion of the whole forecast range which lies between [D] and [C]. A 25 RI has 3 times as much upside price change outlook as downside.
The sample provides a common experience base for all stocks, at their current level of expectations about the near future, individually. The ODDS of having a profitable buy from today’s RI are shown in [H]. The realized net gains of all in the sample, including losses, are in [I]. These are the potential rewards of Figure 1, to be engineered with in selecting one or more of today’s capital commitments, probably more reliable than the offer made by [E]. Its Credibility is measured by [N] I comparison with [I].
We make the prospects for each security more comparable by weighting their [I] Rewards and [F] risks by the associated [H] and 100-[H] odds at columns [O] and [P], netting them together in [Q]. Finally, [Q]s are equated in a time-sensitive form by using [J] days held to measure their odds-weighted basis points per day in [R]. (A basis point is 1/100th of a percent)
WOW! Look at ASND. It outstrips everything else in Figure 2, with 300 bp/day. Which makes clear the importance of having a sample of sufficient size to have statistical significance. Instead, ASND has only five prior days of forecasts where the market quote of the forecast day was -8 (percent of the whole forecast range) below its forecast low. And we could only look at data from the last 355 days (~1 ½ years) because the stock is a market newbie.
We included ASND to draw attention to three other stocks with samples fewer than ten and a couple of marginal ones at 15. The others are robust enough, drawn from multi-year experiences, to support qualitative choice decisions.
Investors should set their own preference boundaries. What may be rightfully demanded by one may be too demanding for another. Where to draw the line on profitability odds proportions, maximum price drawdowns, typical holding periods needed, or size of gains in prospect are often matters of personal choice. Hopefully, this style of data makes such preferences possible and practical.
Our experience with what can be seen in Figure 2 leads us to be more impressed with the combination of Win Odds, Realized Payoffs, Maximum Drawdowns, and Odds-Weighted Net bp/day for ARNA than any of the others. You make your choice. No right or wrong at this point, only (for each of us) better or lesser.
Where the critical elements of capital commitment choice are defined by Figure 2 and there is strong suggestion of preference for Arena Pharmaceuticals (ARNA), here is a profile of that competitor from Yahoo Financial:
Arena Pharmaceuticals, Inc., a biopharmaceutical company, focuses on providing novel medicines with pharmacology and pharmacokinetics to patients worldwide. Its investigational clinical programs include ralinepag (APD811), which is in Phase III trial to treat pulmonary arterial hypertension; etrasimod (APD334) for ulcerative colitis, and Crohn's disease, as well as for atopic dermatitis and other indications; and Olorinab (APD371), which is in Phase II trial for the treatment of gastrointestinal pain. It is also developing APD418, a calcium-independent myofilament derepressor for the treatment of decompensated heart failure. The company has collaboration agreements with United Therapeutics Corporation; Everest Medicines Limited; Axovant Sciences GmbH; Outpost Medicine LLC; CY Biotech Company Limited; Boehringer Ingelheim International GmbH; Eisai Co., Ltd.; and Eisai Inc. Arena Pharmaceuticals, Inc. was founded in 1997 and is based in San Diego, California.
Arena Pharmaceuticals, Inc.’s ISS Governance QualityScore as of July 29, 2019 is 3. The pillar scores are Audit: 1; Board: 2; Shareholder Rights: 3; Compensation: 6.
It has only 194 employees despite its 22-year existence. The firm relies on collaborators for developing product, once research testing has been accomplished. The firm has in hand over $1 billion in cash, so no financial pressures should arise during that phase on more than one product coming to market. More conventional analytical articles are available by other Seeking Alpha contributors. ARNA has the largest number of SA reader-interest of any of the other biotech stocks in Figure 2.
SPY is included in Figure 2 for reference as a market index average set of current price change prospects. A more inclusive backdrop exists in this day's MM-implied forecasts for over 2,600 stocks and ETFs. An average of the best 20 of these is presented for comparison by the stocks in this article, where ARNA matches up quite competitively.
The presented evidence suggests that Arena Pharmaceuticals offers now the most likely of these biotech stocks to provide strong, prompt portfolio wealth building by near-term capital gains.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ARNA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.
We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So, our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name. Early second-quarter closeouts of 800+ MM Intelligence List positions are running at net CAGRs of over +76%.