The Second Lesson of Successful Biotech Investing
Editor's note: We're on day two of Stansberry Venture Technology editor Dave Lashmet's Digest takeover.
Yesterday, he shared the three guidelines he uses to find the "1%" of small-cap, speculative biotech companies for Stansberry Venture Technology.
As we've discussed, Dave's track record is one of the most impressive we've ever seen. For example, just last week, he locked in yet ANOTHER 100% winner. (For those keeping score at home, that's nine companies Dave has recommended that went on to more than double.)
As Porter wrote in a recent annual Report Card...
This track record isn't luck. It's a testimony to Dave's incredible work ethic and talent. He's constantly traveling to industry conferences, meeting with corporate management teams, and hiring consultants to help him vet new technologies and drug pipelines. He has also built a deep personal network through his almost 20 years in technology.
Without further ado, here's Dave with the second lesson of successful biotech investing...
The second lesson of successful biotech investing... The game of Monopoly... Patents rule the biotech sector... Why PD-1 matters so much for immunotherapy... Are you signed up for Wednesday's briefing?
Any successful biotech investor needs to understand the board game Monopoly...
To win a game of Monopoly, you buy properties and collect rent when other players land on them.
The most valuable high-rent districts in the game are "Boardwalk" and "Park Place." As a kid, owning both properties meant you were likely to eventually win. It was just a matter of time before someone landed on them and had to pay you the big bucks.
Real-world investing might not seem like this classic game. But in the biotech sector, these same rules apply.
That's because of patents...
Biotech isn't like the 10,000 smartphone patents that Apple, Google, and Samsung all fight about.
In biotech, only two patents usually matter...
The first is known as the "method" patent. This is what a drug does or how it's used.
The second is the "chemistry" patent. This is how a drug is made.
With just these two patents, you have a monopoly. Thanks to patent law, no one else can make that drug. Instead, if another company wants to compete, it has to use different chemistry.
And that's where most investors leave it – if a company owns a patent or two on the drug it's developing.
This is a major mistake that many biotech investors make...
They're forgetting the patent for a drug's target in the body.
Discovery or "landscape" patents cover larger territory. We are talking "win the game" windfalls... when your rivals land on Park Place, then Boardwalk.
The perfect case of a landscape patent is in the new class of "immune therapies" for fighting cancer.
Cancer immunotherapy works by awakening your immune system to a cancerous tumor.
Normally, your body seeks out damaged cells. Then it either eats them or asks them to commit suicide.
So an established tumor must have some way to "hide" from the surveillance of your immune system. For example, some tumors hide by pretending to be a fetus using a protein receptors known as "PD-1." We explained this in an April 2015 special report for Stansberry's Investment Advisory subscribers. Here's what we wrote...
PD stands for "programmed death." When your immune system encounters PD-1, it knows that is healthy tissue and it should not attack. Fetuses are covered in PD-1. It's nature's way of making sure mom's immune system doesn't attack the "foreign" baby cells.
Cancerous cells make lots of PD-1 signaling proteins. They essentially use PD-1 to disguise their tumors as fetal tissue to keep the immune system at bay.
To be specific, a male fetus is protected from the mother's immune system by this life-saving PD-1 "stop" signal.
Here's why focusing on patents is so important...
All of this was figured out in Japan and published in a top U.S. medical journal in 2001. It's foundational. Meanwhile at Harvard, scientists found a new potential drug target via the Human Genome Project.
To help figure out this new drug target, they asked experts from Japan who knew this same target, PD-1. In fact, the Japanese team cured cancer in mice using a specialized antibody against PD-1's counterpart.
So the Americans and Japanese wrote a second paper together... And then Harvard claimed all the credit by applying for a patent. The U.S. Patent Office, none the wiser, issued the patent.
Next, Harvard licensed this landscape patent on PD-1 and its uses to a dozen different Big Pharma firms. But there's one problem...
Nothing can stop the claims of the inventors from Japan...
They filed their invention first. (It's almost like they didn't trust Harvard.) And go figure... their patent has been a multibillion-dollar windfall already.
To wit, Bristol-Myers Squibb (BMY) sold $1.3 billion of a PD-1 drug last quarter. Merck (MRK) sold $1 billion of its own PD-1 drug. These drugs are still ramping up, too. Bristol-Myers' revenues are growing at a 40% clip. Merck's are up 200%.
But here's what counts: Bristol-Myers owns Japan's "landscape" patent on PD-1 globally. It owns the target.
PD-1 drugs have proven highly effective, and are FDA-approved to treat seven different cancers... plus, remarkably, any cancer if all else has failed.
In fact, the top medical journal in the world – the New England Journal of Medicine – had to send out a warning to doctors to be on the lookout for patients on a PD-1 drug being cured of cancer between visits!
That's how much promise they are already showing. And doctors are now working to make these PD-1 drugs even more effective through combination therapy.
That means significant upside to whatever company controls these core landscape patents.
Bristol-Myers ended up suing Merck for infringing on Bristol-Myers' PD-1 "property." And Bristol-Myers won big...
For one thing, Merck has to settle through a single $675 million payment, plus an ongoing 6.5% royalty. Practically, this royalty payment is likely on a sliding scale, in case Merck drops its price. Put another way, this discourages Merck from lowering its price, which gives Bristol-Myers steady margins.
That's what we think of as monopoly control, just like with software titan Microsoft. When you can set the price versus your rivals, the only price that matters is the highest one the market can bear.
Moving forward, we expect the other Big Pharma companies infringing on this PD-1 landscape to also pay Bristol-Myers. Because winning once in patent court sets a precedent to help win again.
You can see why we own Bristol-Myers in Stansberry's Investment Advisory: the company owns the landscape.
So that's today's lesson on biotech investing from Stansberry Venture Technology, based on the game of Monopoly.
And the importance of patents in cancer immunotherapies goes beyond PD-1...
Let me explain: Best case, these PD-1 drugs are helping 30%-40% of patients. This suggests that there could be ways to help the other 60%...
We've found three other ways that cancer tricks your immune system...
And in Stansberry Venture Technology, we've recommended companies behind drugs that can reverse each one... "waking up" your immune system to fight the cancer.
Notably, these three ways are based on core discoveries about the key target in your body. That means each discovery yields a method of fighting cancer... and three more "landscape" patents.
This is more than science. All three drugs are being tested in combination with PD-1 drugs in human patients in the U.S., Europe, and Japan.
So there's still more to all three stories...
And note that we've already doubled two of these positions.
Each time, we recommended selling half of our position at 100% gains. This is how we control our risk in the Stansberry Venture Technology portfolio: We take our initial capital off the table and treat the rest as "house money."
In other words, the capital at risk in the model portfolio for two of these positions is zero. We get to treat them like a free ride.
Now, we don't have a crystal ball. We don't know if any of these ideas will pan out in later clinical trials. What we do know is that all three are in a kind of cancer medicine generating billions of revenue per quarter. So by buying the landscape patents, we control against any future trespassers – just like in the game of Monopoly.
And when these three drugs have positive trial results or receive approval, we stand to make 100%, 200%, or much more as investment gains.
That's my second secret of biotech investing: To win, you'll need to have a monopoly on the landscape.
My thanks to Monopoly's creator – Parker Brothers – for teaching me this core tenet of biotech investing back when I was 10.
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November 14, 2017
Editor's note: Tomorrow at 8 p.m. Eastern time, Dave and Dr. David "Doc" Eifrig will be hosting Stansberry Research's first-ever cancer webinar...
They're going to be talking about two important cancer treatment developments... The first, cancer immunotherapy, which Doc calls the "Living Cure." It's extending the lives of people with supposedly "incurable" cancers... even wiping out cancers completely.
In fact, all attendees tomorrow night will receive a free Living Cure e-book from Doc about this important development. It's one of the most important resources for anyone with cancer or who knows someone with cancer.
They'll also discuss a new cancer breakthrough that could soon be a staple in every U.S. hospital.
Again, this webinar is absolutely free for Stansberry Research subscribers. But you must pre-register to attend. Click here to reserve your seat now.