The Life Sciences Report: What is it about December and January that traditionally makes investors more bullish on biotech?
Andrew McDonald: Both the annual JPMorgan Healthcare Conference and the Biotech Showcase in San Francisco are big industry events that kick off the year. A lot of enthusiasm came out of the JPMorgan conference, with announcements from larger market-cap companies that tend to get investors excited about the upcoming year’s revenues, earnings and new product watches. At this time of year, those conferences demand investor attention.
TLSR: Andrew, you’re an analyst and adviser to two exchange-traded funds (ETFs), but previously you worked in a development-stage biotech company as a medicinal chemist, where you discovered a selective mitotic kinesin inhibitor that showed promise as a chemotherapeutic agent. The compound was licensed to GlaxoSmithKline (GSK). Is that drug still in active development?
AM: As far as I know, it is not. I worked at Pfizer Inc. (PFE), and at the small company you referenced, Cytokinetics Inc. (CYTK), where I developed that particular kinesin spindle protein inhibitor. Unfortunately, it was too toxic, as are a lot of novel anticancer agents, and so it’s not in development.
TLSR: Regardless of how far that molecule went, it was an experience that most money managers and analysts have not had. How did it inform your professional life as an analyst and portfolio manager?
AM: I spent five years after graduate school working in the laboratory developing new drugs, and today I take that body of knowledge and apply it to the analysis I perform on individual drugs in development. Having that scientific background helps me make good investments.
TLSR: Having been through the rigors of guiding a chemotherapeutic agent from the wet lab bench to in vivo animal models and into humans, are you skeptical about early-stage compounds?
AM: Yes. I’m extremely skeptical about early-stage, and even middle- to late-stage compounds. I’m always amazed that so many people are interested in investing in biotech companies but don’t have a full appreciation of the risks, particularly with early-stage companies.
“The fact that the oncology landscape is constantly shifting is one of the most challenging aspects of evaluating cancer companies.”
In fact, that was one of the driving forces behind the creation of our two ETFs, which represent baskets of biotech companies that either have products on the market or are developing the next generation of lifesaving medicines in clinical trials. There are 70 or so companies in the BioShares Biotechnology Clinical Trials Fund (BBC), and I can tell investors that some of the drugs in this basket will make it, but more drugs will fail. If you own the group as an ETF, the share price appreciation of the winners will outweigh the losers. We’ve seen that over the last five to 10-plus years. That’s why we steer investors toward buying the BBC and the BioShares Biotechnology Products (BBP) funds. It’s just a much safer way of owning the space.
TLSR: How many stocks are in the BBP? How is the fund balanced?
AM: The BBP is a collection of about 35 companies that have already made it through U.S. Food and Drug Administration (FDA) approval. Their products are on the market, hence the “P” for products. The BBP trades very differently than a basket of clinical-stage biotech companies. Companies with products on the market trade based on revenues and earnings, so in a sense they are much less risky and have a much lower beta than those in the BBC ETF.
