Reflections of Qiu Guolu’s Value Investing Ideas on Biotech

Value Trap

1. Outdated, Inferior technology: such as IONSYS, Afrezza.
2. Commercial failure:
3. Mediocure follower, non-leader: such as Mirna Therapeutics (eventually reversed merged).
4. Highly competitive and saturated indications: HCV field after Sovaldi.
5. Accouting fraud: Valeant.

Growth trap:

1. Overpay for hot biotechs: Dendreon.
2. Missed technology path: RG-101 for HCV (Sovaldi took all)
3. Diversification, no focus: OPK (so many subunits and directions)
4. Accouting fraud: Valeant

Margin of safety:

1. broad applications/assets, one must work: DVAX, ABUS, ALNY
2. value so low that all bad scenarios are priced in: all my picks
3. back up system: be careful of bankruptcy risk.

True vs false risk:

1. Perceived risk and real risk:
   1. When price are high vs low
   2. Read into the data: what is real risk in the drug's data and unmet medical need.
2. Exposed vs hidden risk:
   1. Risk usually exposed after "bad data", "clinical hold", "discontinuation", "restructure", "CRL", "dilution",
   2. "sector consolidation", "healthcare reform", "drug pricing", "election".
3. Fluctruation vs Ruin risk:
   1. Buy cheap;
   2. buy with solid thesis
4. successful biotech investment is to take those risks that have been exposed, felt by everyone, with corresponding discount but very little real danger — those “false” risk.
   1. Be patient, wait for risk exposure, no guess or anticipating; wait until everyone knows and avoids the risk, and price depressed.
   2. Very little real danger: have to fully understand the company, indication, drug and underline problem. Fully confident that it is NOT a problem (false risk).