Hedge funds have doubled their investment in biotechnology over the past two years according to recent figures produced by Nature Biotechnology. Because hedge funds can use investment techniques not allowed to mutual funds, hedge funds can increase returns while mitigating the risks associated with biotech. Consequently, they have become increasingly popular with biotech investors. New regulations forcing hedge funds to register with the Securities Exchange Commission (SEC) are unlikely to have any effect on the trend either. However, the lack of long term commitment of hedge funds to the success of the industry in favor of quick returns means that the funds may not be a biotech’s company’s preferred shareholder.

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Volatility is a word that sometimes connotes capricious price movement in stocks. And while biotech stocks are often volatile, to think their price movement is capricious is to misunderstand those things that go into pricing biotech companies in the stock market.  A prime example in understanding market valuation can be gleaned by taking a look at one of the best performing stocks from 2005 and deconstructing its valuation. 

Ironically, Myogen, a biopharmaceutical engaged in researching cardiovascular diseases saw a rough start to the year in 2005

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When asked about his philosophy for success, Exelixis CEO George Scangos likes to quote JP Getty: “Get up early; work hard; find oil,” he deadpans. It’s a fitting creed for the personable Scangos. Like the oil discovery business, biotech requires that you drill a lot of holes; most of them may come up dry.

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