Luke Timmerman (Xconomy) is out this week with a piece entitled "21 Red Flags to Watch for in a Biotech Company". With a bit of help from biotech investor/commentator Brad Loncar, he touches on a topic near and dear to the heart and soul of BiotechDueDiligence. Soon after, David Sable offered a follow-up piece with more biotech red flags, set from the "inside the boardroom" perspective. Biotech entrepreneur Katrine Bosley jumped into the fray on Twitter and promised us an upcoming list from the executive's perspective. She has now delivered with Red (and Green) Flags To Look for With Biotech’s Buyside Investors (Xconomy).
Each of these articles is must read material and have been featured, along with other content from key thought leaders in the biotech world, in my weekly Biotech Reading List series - check these out if you have not before.
I thought I would add a few more red flags to the list. My examples come from a decidedly more "outsider" perspective. Fragments of this post have rattled around in my mind for a long while, but now I have found the inspiration to follow through. Here are five more red flags based on my experience. Of course there exceptions to all of these, but I am willing to stick with the percentages.
As time allows, I will add to the list - perhaps you would like to do the same in the comments section or by contacting me directly.
Maybe I will have to revise this one if companies continue to be able to IPO at will with preclinical assets. But for now, I will stay away from companies touting results obtained in petri dishes and mice - particularly touting metrics such as improved survival. The relevance to human drug development and future commercial value is just too tenuous. Heck, even I cured cancer in mice for my PhD dissertation too...and no, you won't find that miracle drug on the market anywhere.
Reliance on anecdotal imagery in oncology
You have all seen it in an oncology company slide deck...the horrid tumor on the left panel of the scan, and the dramatic resolution on the right. If you are in your first-in-human clinical trial, I will cut you a bit of slack as you try to convince Wall Street that you have an active drug. But if we start to see the same patient featured quarter after quarter or year and year (instead of going out and getting some real clinical trial data), that is a different matter. Examples in the BDD universe have included SUPG/ASTX with amuvatinib (same scan for years, while the drug died a slow death) and SNTA with ganetespib (in breast cancer, from a trial that failed to achieve it's Simon two-stage endpoint for expansion / continuation).
Attempting to ride the coattails of the current fad
There is always a hot topic in biotech and/or public health...think SARS, immunotherapy (Dendreon's Provenge), bird flu, bioterrorism, or immunotherapy (PD-1 / PD-L1). Invariably there are a few low-grade companies who rush out some "data" or "announcement" about their drug's magical new applicability to the trend of the moment. It of course never amounts to anything, except for stock offerings.
Public protest or praise
I will lump these together...go ahead and move on if your biotech of interest either 1) issues a PR to rebut a SeekingAlpha or similar internet post or 2) issues a PR consisting of a "folksy" (to borrow the term from Roy Friedman) letter to shareholders highlighting their vast accomplishments and future potential.
Low-quality and/or low-integrity investor relations
Pretty much every biotech company has contact information for Investor and Media Relations on their website. To me there is simply no excuse for failing to respond to a simple, direct, and reasonable inquiry. I have taken to sending a "test balloon" communication - a follow-up or clarification of a statement on a recent conference call, a request for a particular slide deck or scientific poster presentation, etc. A company either follows through or it doesn't and there is no excuse for the latter. Further, such a response should not depend on the size of the portfolio you manage nor the masthead you write for. Even when my inquiries got deeper and more probing, I'll single out reps from INFI, ISIS, LGND, OGXI and TKMR for some great interactions over the years. On the other hand, sometimes pleasant conversations turn sour (or silent) when "uncomfortable" questions or topics are broached. I won't use this forum to single out specific examples, but sometimes this turn of events is more than enough to confirm pre-existing negative sentiment about a given situation.
There is the first 5 additions I will make to the biotech investing red flag list. I can clearly think of one company which has breached at least 3 of these - extra credit if you can name the stock or come up with a more severe offender!
On a (somewhat) lighter note, two bonus red flags
1) Making your executive team refer to you the CEO as "Doctor" on conference calls. Bonus points when combined with an insane rate of turnover in C-level executives over a multi-year period.
2) Changing the color scheme / design / layout of the corporate slide deck. This one is mostly in jest, but fits with the broader red flag of watching for companies that suddenly and without explanation spend more or less time than usual discussing a given drug, asset, or clinical trial. Sometimes news is announced by what is not said.