Playing the Biotech Averages

What’s the value of all that research done by Wall Street’s biotech analysts? Not as much as you’d think, says former Robertson Stephens biotech analyst Michael Walsh, who recently started a Chicago-based biotech investment fund manager, Kilkenny Capital. His notion: the labor-intensive research he used to do, particularly his involved discussions with experts, works no better than a matrix of biotech success averages, standard market sizes and defined corporate conditions which can be applied to a much broader universe of companies.

For example, Walsh applies a particular success average to products with “robust” phase II data and a different one to “preliminary” phase II. Upsides and downsides to stocks get computed through the averages and the database of market sizes and conditions Walsh has compiled. When Walsh goes long, he buys biotech’s less favored stocks—those selling at close to what he computes as their downside value. He sells short those stocks near or above their upside value. In a good market for biotech, he says, his fund won’t do as well as the biotech indeces—but in a down market it will dramatically outperform them.