It’s a common occurrence in the biotech sector; a company is doing fantastically, their stock rising, due to great news about their product, and then all of a sudden someone you’ve never heard of, someone who is “short the stock” (we’ll talk about what that means in a second) comes out and says the stock is worthless and, in the blink of an eye, the stock price tumbles. What should you do? Jump out with the crowd? Assume that the short seller is right? Or hold on tight?
Let’s start with a disclaimer in the style of the short sellers who are the topic of this blog post: some of the affiliates or members of BTA have long positions in the two companies, AVXL and APDN, that we are about to mention. That’s because our point here today is not whether you can or should invest in any biotech company; it’s about what you should, and shouldn’t, look for when making those decisions.
Anavex Life Sciences – What Happened?
Anavex Life Sciences (AVXL) is a company working on Alzheimer’s solutions that we at BTA have been following for a while, and last week, following the release of an abstract (or pre-release summary) of news about their product testing, their stock began to freefall. This came on the heels of a tweet by Martin Shkreli, a hedge fund manager:
$AVXL looks worthless. Compound is uM for sigma receptor (meaningless affinity) and rest of muscarinic. Co. confused if its agonist or ant.
— Martin Shkreli (@MartinShkreli) November 5, 2015
If the name of Shkreli sounds familiar, it should. He is the guy who bought a pharma company and tried to raise the price of its drug 5000% (to up to $750) when another company could easily under cut him by selling it for $1 a pill, causing a massive decline in stock prices across the board in the biotech industry when his action led to calls for industry price controls. Shkreli also recently shorted AVXL, saying in a tweet, “I shorted AVXL – I do not believe the drug *can* work given its PK and receptor pharmacology profile.” Being “short” a stock means that Shkreli will make money if the stock price goes down (usually by selling the stock without actually owning it and buying it at a later date).
The easy question, of course, is: why listen to someone who wants the price of the stock to go down and who already damaged the industry’s reputation by irresponsibly jacking up the price of a pill?
But the more important question is: why not just look at the actual information? The abstract is publicly available, and its conclusion contains nothing surprisingly, given that the study was only conducted to determine safety: “Data collected so far indicate that ANAVEX 2-73 is safe and well tolerated. Interim results also show improved cognitive performance after drug administration in subjects with mild-to-moderate AD.” Yet, investor confidence was shaken by something as seemingly insignificant as a tweet from a hedge fund name.
Applied DNA Sciences – Doing the Research
We can take a similar story regarding Applied DNA Sciences (APDN), a company producing DNA authentication technology. After the stock price began to rise, an anonymous article appeared on the investor website SeekingAlpha.com claiming that the entire company was a scam and that the tech was really just 1990s Chinese technology. The biggest takeaway? The writer of the article admitted to being short the stock. Is it any surprise that an anonymous person who is short a stock would write an article claiming that the entire company is a scam?
However, even a little research in the writer’s claims reveals their flaws. The writer claims that the company’s botanical DNA imprints (which are used to verify the identity of materials that are bought and sold) are useless because there are now synthetic DNA strands available. Except that the DNA imprints of Applied DNA are synthetic—they are just created from botanical material. The writer also claims that the tech is old Chinese technology—but if that were the case, why would the US military be requiring some departments to use this technology? The writer blasts the company for not disclosing the details of their government contracts—but such non-disclosure is a requirement for those contracts, so how could APDN disclose the details? The writer even goes as far as to note that the company spends very little on research and development, which would be a problem were it not for the fact that APDN also owns the patents on their technology, and the concern for the company now is selling their product, not creating new ones. This is not a medical company trying to develop new drugs; it has a product and it is trying to sell it.
Again, none of this means that either APDN or AVXL will be successes; they might both fail. But even a little research would have revealed that the stories behind Applied DNA Sciences and Anavex Life Sciences are much more complex than a tweet by a hedge fund manager or an anonymous article by a short seller would have us believe.
Summing it All Up
When investing in biotechnology, the key is to invest not on hearsay or anonymous tips and one-liners, but on the merits of the company. Investing in memes, fads, or trends can work short-term, but in the long-term what truly counts are the fundamentals:
- Does the company have enough money to last?
- Does the company have a product with a good probability of success?
- In which phase of FDA testing is the company?
- Does the company have insiders who are committed to the product?
None of these questions can be answered by tweets or anonymous articles. No short seller or stock pumper is interested in laying out the pros and cons of a company. Nothing can replace actual research into the fundamentals. When dealing with biotechnology, don’t invest in the memes; invest in the merits.
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