I spent many years of my life doing research in biophysics, complex systems, quantum chemistry, and molecular biology, the fields actively involved in cancer research. I did my Ph.D. Summa Cum Laude at Max Planck Institute of Physics of Complex Systems, my Ph.D. advisor was a world renowned scientist studying how different molecules bind to each other. I was awarded Otto Hahn Medal of Max Planck Society for my graduates research. Then I moved to Los Alamos National Lab in New Mexico, where I studied dynamics of proteins and was named Director's Fellow. I moved to Stanford, to work for a recent Nobel Prize Laureate who was interested in replication of DNA.
Then my life changed dramatically as I became an entrepreneur in a number of successful startups. I learned people, their bright and dark sides. I started to trade biotech and IT stocks, mostly on the short side. As I scientist I could identify companies, where the claimed technology was grossly wrong. I loved cancer stocks, because they involved molecular biology, chemistry and physics.
And then a thing happened to me that I thought would never happen. A close relative of mine was diagnosed with Stage 4 Colon Cancer. Trading, while being a caregiver was not an option. I turned all my stock positions to cash. For two years I was trying to find a solution to a problem that I new was almost impossible to solve. I became intimate with the world of doctors, nurses, chemo rooms, side effects, cancer markers and a myriad more things. I met huge number of fantastically good people. And also some people who were just making money.
So here I am now. And while I am not currently trading myself, since I am concentrating on my next venture, I think I can provide lots of advice to others.
So here my 12 rules for cancer stocks that should help you, sorted in pretty much random order.
1. One of the reasons why great Stage 1 Trials are frequently followed by a Stage 2 fiasco, is because it is always possible to make a cancer patient live longer by providing better care and hope. Stage 4 cancer patients in many cases pass away when they decide it is time of them to do so. They just do not want more torture. Doctors are usually busy and the patient spends most of the time at home. It is up for the patient to decide to go to the emergency room one more time or just stay at home. Going to the emergency room on any sign of a serious problem such as infection can easily make patient live 2 or 3 months longer. If you are on Stage 1 trial and you think the wonder drug is just about to start working it gives you strength to keep on fighting. You will live longer if you fight.
2. When you invest in a cancer drug company there is usually not much information coming out of the company between two consequent major information events, such as releases of clinical data or partnership / acquisition events. The stock price will fluctuate wildly though, because of short-term trading and because of large investors moving in or out. If you long or short a cancer drug based on your analysis of fundamentals, it makes sense to time-average your stock purchases (or shorts) a little.
3. If you long or short, do it in pairs so you are not sensitive so much to fluctuations in the overall market. You need to focus, so if you a shorting a particular stock, balance it with either longing an index fund ( such as a biotech index) or a particular stock that you like.
4. Never short a stock after the information is out that the drug is not working well. You may think that the stock going to zero is a sure bet, on the other hand there may be a short squeeze or some crazy large company may acquire the company you shorted since they may think the price is attractive. Only short when a sufficient number of others think the stock is great.
5. If you are an individual investor, keep your short selling to drug companies with less than $100 M capitalization. Institutional investors will not usual care much about them, so your analysis will have a better chance of making a difference.
6. Never long a cancer drug company with less than $50 M capitalization. If the capitalization is so tiny, it means the company has a so-so drug candidate. It is extremely hard to properly price such companies (see the next point).
7. There a drugs and companies with a great potential. Long them. There are drugs and companies, where things are extremely wrong. Short them. Those mediocre players in the middle, you can't price them. They may ultimately get acquired, the price will be mostly determined by negotiations though, and you can't predict this unless you are an insider. There are many behind-the-curtain things going on in pharma industry that you have no idea about.
8. If you find a great drug candidate, and you do lots of research and find additional arguments that nobody else has, showing the drug will succeed, long it. Additional arguments is the key concept here. Great drugs are routinely underpriced against mediocre drugs because people tend to spread their bets, and because most investors have no clue about the underlying science so they can't really differentiate.
9. If you want to short, look at people first. Honest people will not work for a cancer drug company that they know will never succeed. Just apply your common sense to differentiate between honest people and dishonest people. Look for management with no relevant education or experience and for people that failed before. Talkative flamboyant people are a bad sign. A decent cancer drug company should not be run by a used car salesman. And some of them do.
10. Do a preliminary analysis on all companies in the sector. Find five great companies to long and five terrible to short. This will be enough to hedge your bets a little. Forge the rest. You can't price mediocrity.
11. Never sell a good company on a sudden drop in stock, unless it is a relevant event that you know about, such as clinical trial results. Same for shorting. Wall Street can drive stock prices back and forth on no events happening. If a relevant event happens, which shows you were wrong, get out of the stock immediately.
12. Nowadays a successful blockbuster cancer drug should involve one of the following in some way: immune system cells destroying cancer cells, viruses spreading through cancer cells, targeted molecules influencing well studied biological pathways. Do not go for yet another chemo, radiation drug. There is little chance of them becoming blockbusters. Do not or for snake oil type of things. If you think it is a snake oil, it is a great candidate to short it.
13. If you are trying to short a stock and it is not available for short, wait a little and try again. There are stocks which are available to short from time to time, you have to keep on trying. If it is a terrible company and you are persistent enough to get the stock shorted, this may be a great win for the future.
14. Read scientific papers behind the drug. If there are not many scientific papers available, it is a bad sign, a promising direction will be generating lots of scientific activity.
15. Go to scientific conferences and meetings - it is a great investment to hear people talking about the drug or company you are interested in.