8/12/18

Biopharma/Investing
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Interview questions for an incoming pharma/biotech BD/M&A analyst follow. No one can do this job effectively by themselves, so hiring the right people is essential. The list isn’t exhaustive but reflective of my own interview style. Answers or reasoning for questions are at the bottom.

1. Describe the cell cycle in as much detail as you can.
2. If you were to receive $1 annually on 1/1/xxxx from a reliable party, what could you sell this income stream for?
3. Company A generates $10 million in stable, recuring income/cash flow from $100 million in revenue. Company B is the same as company A, except you are told that Company B has a $10 million annual party (still $10m profit on $100m in revs). What would you buy company A and company B for?
4. What is the most surprising clinical trial result you’ve seen?
5. What drug in clinical trials today do you believe will fail?
6. What disease state offers the largest business opportunity for a new medicine and what approach would you take?
7. Name 3 undervalued public biopharma companies.
8. Describe a large scale protein production process in as much detail as you can.
9. Describe the prototypical (perhaps stereotypical) physiochemical properties of a psychiatric medicine in as much detail as you can.
10. What element are you? Why?
11. What medicine do you most admire? Why?
12. Two companies, Pfizer and a small biotech company, are vying to bring a new class of medicines to the market. Pfizer is one year to two years ahead of the small biotech company. Hypothetically assume Pfizer has a change of heart unrelated to the programs’ prospects and you can acquire either program for $50 million. Assume the separate programs have an identical likelihood of technical/regulatory success. What questions do you need to ask to inform your choice?
13. In what circumstances has a method of use patent been upheld?
14. Give some examples of revenue size by country of a pharmaceutical. Be as detailed as possible (revenue in Germany, Japan, China, France, etc).
15. What type of return in achieved by: venture capital funds, internally derived R&D, acquisitions, healthcare private equity and healthcare hedge funds. Is there an optimal capital allocation process for a pharmaceutical investor?
16. What went wrong for Valeant?
17. A paper appears in Nature detailing what appears to be a tremendous advance in a therapeutic area by means of a preclinical experiment. The university team is willing to license the work to you for $5 million. What do you do to ensure your maximize of success?
18. A drug candidate has a 50% reduction in symptoms from baseline with a within-group p-value of 0.0001. In this placebo-controlled study the across-group comparison p-value is >0.05. What is your interpretation of this result?

Book Review: The Acquirer’s Multiple by Tobias Carlisle
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One of you philistines sent me this, unsolicited. An appropriate subtitle would have been: Sophistries from a Confused “Value” Investor.

I have no idea who Tobias E. Carlisle is. Does anyone? Don’t write books about things you haven’t done. I’m not going to write a book called “How to Win the NBA Finals: Secrets of the Hook Shot”. It’s hard to write a book about investing if you haven’t done it and done it really well. What brings someone to the point where they feel they have to regurgitate the limited knowledge they’ve acquired in a field? Is it their tremendous writing skill? Carlisle provides zero evidence of creativity or aptitude in English language word selection and ordering. So, it must be that what he has to say is so important and learned that we should ignore his inability to articulate it!?

No. The actual content of the book is laughable. I was astonished at many points during reading that someone, even the author, thought this template of inanity was worthy of reproduction. The book begins by introducing a few concepts and platitudes which annoyingly recur. Carlisle’s writing strategy is to repeat his maddeningly ambiguous “point” so frequently and without variation, it borders on absurd. Mean reversion is the most powerful force in investing, the author would have us believe. I assume Mr. Carlisle is long Sears, Radio Shack, Toys R Us, Gap, American Eagle, Pacific Sun and is short Amazon and still waiting on that mean reversion. Me? I have a long list of biotech stocks that failed Phase 3 trials and went bankrupt, I’m long those, and short Gilead, Roche and Novartis as what goes up must come down. Gravity just doesn’t have the same sway Newton predicted in the strange universe of equities pricing.

Carlisle keeps talking about how one has to defy the “crowd” to be a successful investor. But what is the “crowd”? Or even the “market” for that matter? Carlisle doesn’t realize these are silly adages bereft of logic. “To beat the market you have to do something different from the market”. Really? So to outperform the S&P I have to not be long every single stock in a size-weighted approach? Tautologies abound for the forsaken person who has received this book as a twisted joke of a gift.

Carlisle insists mean reversion is the force that pushes up undervalued stocks. No. I define that force as “alpha” or “arbitrage” (it is also the size of the delta between market price and our derived price). In my framework, over time, alpha approaches 1. Mean reversion has nothing to do with it. For instance, a drug company worth $1 billion announces a breakthrough. The stock goes to $5 billion and stays there for 5 years. They plan another breakthrough, it seems like it will work, but the market doesn’t notice it. You go long. They announce the breakthrough and the stock goes to $15 billion market cap. The gap closed because of alpha realization, not mean reversion.

Another absurd tautology: Undervalued stocks tend to beat the market. A child could tell you that ONLY undervalued stocks beat the market. Of course, as we’ll painfully learn, Carlisle thinks that undervalued stocks are those with low earnings ratios. Yes, the key message of this book is to buy stocks with low P/E, EV/E, and finally, the eureka moment that rivals Einstein, EV/EBIT. Buy low. Sort a list of stocks and buy the low ones and you get rich. That’s what the book says.

Empiricism should never trump logic in investing. The greatest human folly of logic is ‘it happened before so it will happen again’. The amount of money lost, lives lost and destroyed productivity that groundless but intrinsically attractive repetition of prior processes to achieve future results has cost our species is immeasurable. Carlisle doesn’t provide any data or serious methods to allow the examination of his claims. He excludes a large number of stocks, and only US stocks for only short periods of time, where the market did extremely well. One obvious hidden bias to his approach is cyclicality. When the economy is doing well, and the US has done very well, and booms are longer than busts, cyclical stocks do better than the market because of the surprising economic resiliency. Recessions are shorter than investors thought, so stocks do better. Without shorting corresponding stocks, its hard to really know what alpha this system generates. We can see it generates a terrible drawdown and a Sharpe Ratio no better than the market. No serious quantitative investor would ever employ this “algorithm”.

It takes a lot of audacity to write a book that says “buying stocks that meet this secret criteria will make you rich!”. Okay what’s the criteria!? “Low earnings ratio!”. I wanted to throw “TAM” across the room when I realized the writer’s core message. Most of the book is similar to “The Dhando Investor” in that it parrots Buffett, but also includes genuflection to more recent investors like Icahn & Loeb. Like a child nervously glancing at his parents at a piano recital, Carlisle hopes that the conjuring the authority of Buffett will lend credence to his system. Coincidences in Buffett’s approach lend no credence to Carlisle’s system any more than my own obsession with Cherry Coke has made me a great investor. What the author doesn’t realize is that the investors he tries to demonstrate his system emulates have their best days behind them and new methods replace old. Prior world record holders would not qualify for today’s Olympics. We laugh at chess games from the early 1900s and know a moderately-ranked master would likely be the World Champion of 1912. Virtually any competitive sport or activity has the same dynamic: chess, poker, running, surgery, and definitely investing. You can’t look to the past. The people who we are to emulate and admire according to Carlisle were mavericks and innovators. You’re not being an innovator by copying what someone did in 1955, or even in 2000. To beat the market, maybe you have to do something new.

Amazingly, Carlisle advertises his stock screener (only 9.99!) in the book. Anytime someone promises you the fountain of youth, or in this case, the fountain of money, in a “little book” that does something that is very hard to do, but only is asking for your patronage somewhere else, run away. There is one page of marginal interest on overthinking that cannot excavate the reader from the intellectual cave this book builds. Nevertheless, I would recommend “TAM” to a small child (age 6 to 11) curious about the markets. It is simple, short and sets the reader up for more serious thinking later.

Papers I’ve Read
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Combined Analysis of Asthma Safety Trials of Long-Acting Beta2-agonists. Busset et al. NEJM 2018;378:2497-2505.
I wonder how many publications gave the “all clear” signal after writing some scary article about LABAs. I really want to campaign that science writers actually get some (I know this is crazy) science experience. Notice the mITT HR=1.24? Only thing I found unusual here, whatever mITT definition that differed from ITT moved this from no trend HR=1.09, p=0.55 to trend HR=1.24, p=0.13. If it didn’t bother the FDA, it doesn’t bother me. Goodbye black box.

Personal
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I might quit trolling. This wouldn’t be a permanent retirement as much as it would be a shift in focus. I intend on doing fewer in frequency but higher-impact public performance art style trolls (eg Wu-Tang). I have been heavily influenced by a loved one in this regard.

I have been busy reading proprietary research and, of all things, working on math. I am particularly interested in algebraic number theory–if anyone out there is a or knows a professor in this field, I would love to compare notes. martin@thotpatrol.com is the best place to contact me.

Interview
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1. I don’t really care if an applicant understands the cell cycle (unless they got a PhD in cell biology and wrote papers on anaphase dynamics!) or can tell me about non-inferiority margins and esoteric statistics or anything else. I’m trying to determine if the person is self-confident, honest, humble, ashamed, self-conscious, etc. after being asked a technical question. The number of people who tell me they have statistical experience or chemistry experience only to swing and miss a softball technical question is large. If you can fluster someone with a softball, they’re probably not a good fit.
2, 3. See question 1. Answer for 2. is $10-$20, 3. $75m for Company A and $140m for Company B.
4. I have a lot of answers to this one. Perhaps the nusinersen results were the most eye-opening in recent memory.
5. Any beta-amyloid mab trial in mild-to-moderate patients.
6. Alzheimer’s disease is the easy answer. Parkinson’s is a great underdog. Autism would be an intriguing answer. polyQ disorders would get a gold star. Treatment-Resistant/Cognitive-Impairment in Schizophrenia would be an accurate answer. Neuropathic pain is not a bad choice.
7. Well, you can read my blog! I’d say GBT.
8 & 9 See 1.
10. Fluorine! Hungriest element! Personality is important. I’m curious how creative candidates are. I’ve asked people what superhero they most identify with.
11. Similar to #10, looking for creativity and values. A bit of a Rorschach.
12, 13 & 14. More general industry knowledge. On #12, first isn’t always best. 13. Rarely, Viagra is probably the biggest example. 14. Most have no idea the relative size of revenue by country–somewhat dependent on the type of medicine.
15. Testing the candidate’s understanding of capitalism. The point of any capitalist entity is to deploy capital and engineer a return on it. So, a drug company is in competition with a drug hedge, private equity or venture capital fund. How are those investors doing? What are they doing?
16. Overpaid for acquisitions as they scaled, NOT Philidor or price increases.
17. Replicate the experiment internally before forking over the big $.
18. No treatment effect.

29 thoughts on “8/12/18”

  1. I smiled at your scathing but probably fair review. That book I never bothered to read, as I suspected it would be as close-to-useless as you’ve outlined. As soon as you know what the “Acquirer’s Multiple” actually is, there’s no point in reading the book; it’s (as I expected) sales material for a separate product.

    Low EV/EBIT and EV/EBITDA appear to be good yardsticks for value, but as always, multiples represent a ‘pricing’ approach to equity and are not a substitute for real equity valuation (i.e. an educated DCF). Shorting “cheap” stocks like brick-and-mortar retail has been a pretty good gig over the past few years. Multiples represent just one model, helpful for providing some additional context, but often not much more.

    Thank you for sharing your interview questions and answers. I’d be interested to learn what superhero you most identify with.

    1. Wow, Martin, very informative as usual, especially the interview. My favorite is “only a longshot can beat the odds.”

  2. Hello Martin, here on the outside shit’s just as fucked as ever. Hope you’re doing well and your farts still make noise. Btw, I sent you 5 more books in the past week and I hope you will like them. Keep going strong dude, you’ll get out in no time.

    Much love,
    Hamlin Skirret.

  3. Any thoughts on upcoming $SGMO presentation of first-ever IVPRP gene editing data at SSIEM & discussions with FDA to move into children after safety review of first 6 patients? Also, gene therapy Hemophilia data to be presented at ASH?

  4. On Valeant I recall the presumed POTUS calling them out by name in a speech. Precipitating the odious aftermath Citron piled on. Failed takeover. Optics / politics was the failure. Philodor was fine at chess but a lousy shell company. Overpaid but why didn’t they do an offering when shares were >$100? Would you have done same as Papa is doing now?

  5. Why is 18 No treatment effect?

    I thought a small p-value would mean you could reject the null hypothesis, in this case the placebo.

  6. Why is 18 “No treatment effect”?

    I thought a low p-value would mean you could reject the null hypothesis, in this case the placebo

  7. For the last couple of weeks there appear to be short positions closing in LCI and a couple filings of institutional buying. Hopefully, the JSP deal for levothyroxine is in the works and the revenue from Concerta will offset any losses from the new contract terms. Curious if an announcement will be made on the 22nd. Hope your well Martin.

  8. who is this “loved one” who was able to convince you to maybe quit trolling? i would like to send them a gift basket or a thank you card and/or possibly interrogate them until they teach me the voodoo that they used. you can send me their contact info via snail mail. lol

    1. Loved ones usually refers to a close relative or friend. He was probably told to keep quiet on some things for his appeals. When are his appeals anyways?

  9. What is your opinion on Protagonist Therepeutics? GI tract targeting vs current immunotherapy approach-destory everything.

    Also why the hefty BVF warrant deal, the co seemingly has enough cash, and can raise at market.

  10. Keep up the postings, I’m enjoying every bit of your words, You are the most under-appreciated genius in medicine. whatever hell you are going through, remember it is temporary…and logically you shouldn’t to be locked up-instead you should have been tried, challenged by those who do not believe your intentions & dreams. A lot more People are demanding answers, especially when majority of our history has been falsified, all lies when archaeological evidence(physical & traditional) has proven that the corrupt systems which was lead by royals & their clergies-still exists today in the same ways…except they just give it a new name “government”. In your case, you did what was best in your promises re business. How many times i’ve come across broken promises in this field but it’s sure interesting when your judge decidedly removed bail, then arrest because of one online post on FB. I find it quite interesting that almost every candidate from 2016 has went against you, for the drug pricing, and the case with the investors but then they don’t want an innovative solution to Daraprim especially when it deals with Toxoplasma Gondii (parasite Changes human behavior)….We know why empathy NEVER exists in top dogs of the monetary system, this is why they’re the best for this career. But innovation? Hah! certainly out the window! and in return comes the pointless debts & profits first over environment & health fixes. Anyway, I’m looking foward to hearing more from you on the blog, and keep us updated on your projects for when you finally be released. 사랑해요! 🙂
    -Renita, V

  11. Does anyone here have the email address of the person that we are supposed to send our questions to? I believe it was in the first blog post, but I can’t find it. Thanks.

  12. I didn’t even make use of the formulas to answer any of the trivia ! My teacher would be so upset , l o l ! I can go over them for fun , although I have no investing skills, I am much better at annual depreciation .

  13. “DOUBLE JEOPARDY”
    “DOUBLE JEOPARDY”
    “DOUBLE JEOPARDY”

    Martin just saved a mega-yacht load of money.

  14. Hi Martin,

    Thanks for writing these. Best wishes. Can’t wait to see what you get up to in the future. It’s going to be huge!

    – CR

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