What an Ideal Venture Investment Looks Like
Editor's note: A revolutionary product and a verifiable monopoly...
Those are two of the things biotech expert Dave Lashmet looks for before recommending a company to his Stansberry Venture Technology subscribers.
In today's Masters Series – adapted from the Stansberry Venture Technology Handbook and the August 2016 issue – Dave shares the third clue he looks for... and walks readers through a real-life example of what the ideal Stansberry Venture Technology recommendation looks like...
What an Ideal Venture Investment Looks Like
Nash's equilibrium method helps us choose the correct path for investing in the future...
Think of when sales and profit data have all been reported as the "showdown" in a card game, when the cards are laid bare. To outrun everyday investors before this point, we have to start early... when we can see demand, even before a product hits the market. Or at the latest moment, just as a new product starts its initial sales ramp.
Every business school teaches this concept. It's how junior executives sell their ideas to senior executives. And business cases are always pie in the sky... they are well-controlled stories about what might happen.
However, there's a controlled environment for testing business cases. It's how successful venture capitalists review a business case, and then choose to sponsor a firm's developing plan.
In Stansberry Venture Technology, we recommend companies that have already completed their initial venture-capital fundraising and have hit the public market via initial public offerings. For these companies, the early foundational risks have been retired.
For biotech companies, Phase II clinical trials are our mainstay. We can solicit expert advice on side effects and medical benefits, but we still need to look at the data as if we're dealing with a business case. What is the treatment worth if it works?
This almost always leads to surrogate comparisons... This exact product can't exist, or it would not be revolutionary. Still, we have loose parameters around price and market size, usually from the company.
Essentially, then, we compare a company's best hope for a product against a real-world test. We don't need to see sales data.
For example, take a drug that can reduce Alzheimer's brain plaque without serious side effects...
In order to place a bet on the future, we don't have to know if the drug is 30% effective versus 40% effective. Right now, no approved drug slows down Alzheimer's disease, and millions of people have it.
So if we are reasonably confident that the new drug from Biogen (BIIB) is poised to be the first effective treatment for Alzheimer's, we can surmise it has some value: roughly, $5 billion-$20 billion per year.
For its part, Biogen has broken ground on a new billion-dollar manufacturing plant to make this drug. Biogen has other drugs for sale now and other drugs in development... But look where it sunk $1 billion.
Again, this is for a drug that has not yet passed Phase III trials, is not FDA approved, and is not for sale. But Roche sells $22 billion of its top three anticancer antibodies. Alzheimer's is no less a threat.
Biogen's Alzheimer's drug alone could make investors a fortune... except that because Biogen is so big, there's less upside. That's why we look for smaller companies in Stansberry Venture Technology.
A great case study for Stansberry Venture Technology is the small biotech Cubist Pharmaceuticals (CBST).
On December 8, 2014, major pharmaceutical firm Merck (MRK) agreed to buy Cubist for $9.5 billion.
Cubist is a biopharmaceutical company that makes drugs to treat bacteria and drug-resistant superbugs. And in September, we recognized Cubist was a takeover target because of its new drug Tol/Taz (renamed to "Zerbaxa").
In the September 2014 issue of our sister publication Stansberry's Investment Advisory, we told readers:
We expect Cubist is on larger drugmakers' short list of acquisition candidates. We can't guess which Big Pharma firm might make the plunge, since all of them can gain from buying Cubist. But the industry is consolidating.
It comes down to this: Tol/Taz – "Zerbaxa" – is the only new Gram-negative antibiotic on the horizon, which means it's a set-your-own-price opportunity for Big Pharma companies interested in entering the specialty market for antibiotics.
The new Gram-negative drug candidate Tol/Taz – "Zerbaxa" – was fantastic in its final-phase trials.
We believe [Zerbaxa] will win approval in December, which gets the sales cycle going in 2015. If a takeover happens, it could very well occur before pricing is set on the new drug. So if a big drug company wants to enter the antibiotic market by grabbing Cubist, it could happen before [Zerbaxa] – hits the market.
Big Pharma wants antibiotics because of the growing threat of drug-resistant bacteria. We won't go into much detail here, but more and more bacteria are becoming resistant to antibiotics because of overuse. And, according to the U.S. Centers for Disease Control and Prevention, antibiotic-resistant bacteria are killing at least 23,000 Americans a year, making it "one of our most serious health threats."
In total, Cubist plans to introduce four new drugs by 2020 to fight drug-resistant bacteria.
It's impossible to know when a company might be bought out and by whom. But Cubist was such an attractive candidate for Merck... not just for its existing drugs, but also for its new drug awaiting Food and Drug Administration ("FDA") approval.
At the time of the deal, as far as the accountants were concerned, Cubist's new drug was worth nothing. It had no sales, and it wasn't even – legally speaking – a product.
What Merck saw was a new antibiotic treating superbugs that could evade most and sometimes all the existing drugs. This new drug was worth billions.
Merck's confidence in this new drug was based on the published clinical-trial results, which were stellar. This new drug was safer and better than the standard of care.
We also learned that in 2012, the U.S. Congress extended the market exclusivity for new antibiotics by five years. In other words, companies get five years more than the normal patent life to sell their drugs before a generic version hits the market and undercuts profits. Since a new drug starts with zero sales and ramps for a decade, taking on five years at the peak of sales doubles its return on investment.
Shares of Cubist surged nearly 36% on news of the takeover. Investment Advisory subscribers who purchased Cubist shares in September were up 49% in three months.
The stock did what we anticipated... and in the time frame we predicted. With Stansberry Venture Technology, we're doing the same thing... Except we're scouring the public markets for tiny, early stage companies that have much, much greater upside potential.
Essentially, we wanted to give our readers the same types of opportunities available to the largest venture-capital firms – which make billions of dollars in profits funding companies like Facebook and Twitter in their infancy. And you can access these opportunities even if you're not a millionaire or an accredited investor.
How to Build Your Stansberry Venture Technology Portfolio
Those are our three criteria for a Stansberry Venture Technology recommendation: a revolutionary product with potential monopoly status in a market where there's future demand that we can verify in a real-world test before a product's launch.
We invest when we can foresee success... whether potential sales are worth the development costs and the risk of failure. Of course, there's no crystal ball. Sometimes, seizing on success still means we are wrong. Our expected timeline is delayed, or a regulator asks for more tests, or a new, better technology gets invented.
The best way to control against these risks is to balance them in a basket of small and medium-sized companies in multiple sectors and on multiple continents. We think that a basket of 10 recommendations is enough for most investors.
Granted, if you sell half of your stake after a stock doubles – which has happened nine times so far for our model portfolio – then you could reasonably have 19 companies in your Stansberry Venture Technology portfolio, because you own nine essentially "for free."
Editor's note: Beginning December 31, a medical breakthrough will be up for worldwide approval... and could triple the share price of the company behind it.
In just 60 minutes or less, it allows doctors to do what no other cancer treatment has ever accomplished... But in less than seven weeks, this device could treat half of all cancer patients worldwide, regardless of the type of cancer.
The footage of how it works is unlike anything we've ever shared before. Watch it – and see Dave's free presentation for an extremely limited time – by clicking here.