A great investing quote, and how it relates to recent biotech IPOs

Monday, 22-September-2014

If you follow the markets even in the slightest way, surely you are well aware of how Chinese e-commerce company Alibaba (NYSE: BABA) was the talk of the financial world on Friday.  The big news, of course, was that the company had its initial public offering on the New York Stock Exchange.  In a wildly successful debut, the offering priced at $68 per share and the stock ended up closing 38% higher near $94.  In fact, after Alibaba’s underwriters exercised a greenshoe option on Sunday night to sell a few more shares, the deal will officially go down on record as the largest IPO in world history.  They ended up raising over $25 billion in new cash, and the company’s market cap is now well over $230 billion.

 

As someone who focuses on biotech, I will not likely be investing in Alibaba or any e-commerce company anytime soon, but it was still fun to watch this all unfold on Friday.  Easily the best part was seeing how Alibaba CEO Jack Ma handled such an important day.  While the kind of success they had calls for plenty of champagne bottles to be uncorked, what really struck me was how humbly he talked about the added responsibility that comes along with raising so much money from investors.  He talks about that here in a video clip from CNBC.

Mr. Ma’s words can be summarized in one of the great new investing quotes I have seen in a long time.  See this from CNBC reporter Melissa Lee:

Those are wise words, and I think there is a lot to be learned from them for the large group of biotech companies that have gone public over the last couple of years.  Already we have seen some squander it in a very public way.  Whether it was the buffoonery of Retrophin (Nasdaq: RTRX) employees imitating “thugs” on twitter, Regado Biosciences (Nasdaq: RGDO) conducting a clinical trial that was way over its head and then seeing it blow up, or Atossa Genetics (Nasdaq: ATOS) not being forthright about an FDA warning letter for nearly a year, some new companies have quickly blown it.  You usually only get one bite at the trust apple, so those three now might have an uphill battle to climb with investors for a long time, if they ever recover at all.

 

One thing that might set Alibaba apart from those examples of what not to do is timing.  Alibaba could have gone public five years ago if they had wanted to, but the company had the luxury of being able to mature and do it at a time they thought was absolutely right.  Alternatively, I am concerned that many biotech companies these days are going public for the opposite reason.  While there have been many high quality ones in this class, many others are clearly doing it because the window has made it so that they can, not because they should.  The public markets can be tough on companies, so those in the latter category will have a lot of growing up to do over a very short period of time.  That is all the more reason for them to take heed of Mr. Ma’s quote above.  Here are some more thoughts about it.

 

1.  Raising money from the general public is a big deal and comes with a lot of added responsibility.

 

It is one thing to manage money for a small group of sophisticated venture funds, but when you accept money from the general public, it adds an even greater level of responsibility into the mix.  While biotech companies like to think that all of their investors are sophisticated, the truth is that being public means you are now responsible for retirement and other hard earned money from regular people who are putting their trust in you.  That is a big responsibility to have, and deserves to be taken seriously.  Furthermore, all investors should be treated the same.  As we all know, there are a few bad actors in the sector that like to take advantage of their public shareholder base as a way of juicing their stock price, but I am not aware of any case like that to ever have a successful outcome at the end of the day.

 

2.  The number one way to honor investor trust is to be transparent and forthright.

 

Drug development is one of the most difficult businesses there is, with one of the highest failure rates around.  Investors understand that concept very well, so it is okay when bad things happen.  What is much more important to investors than being a success from day one, which is unrealistic, is to always be transparent and forthright about what is going on with the business.  If you do that, investors will forgive the bumps in the road that are bound to happen, and stick with you through thick and thin.

 

A perfect example that comes to mind is Clovis Oncology (Nasdaq: CLVS).  Even though it was only a short time ago, you might not remember that Clovis’s future when it went public initially hinged on a pancreatic cancer drug called CO-101.  Unfortunately, that drug failed in the most spectacular way possible.  Things looked so bleak afterwards that I remember many investment banks suggesting that Clovis should start trading below cash.  However, as big of a setback as that was, one of the most refreshing things about it was how honestly and transparently Clovis approached the problem.  Unlike some lesser companies, they did not talk up a clever subgroup to keep the drug, and the company, going.  They simply, and straightforwardly, said it failed and moved on.

 

Such honesty is not surprising given how respected and experienced the management team is there, but it definitely did get a lot of attention at the time.  Because Clovis management was so honest about the failed drug, many investors were willing to hear them out on a much earlier stage pipeline that up until then had received no attention.  The result is that many people stuck with them, believed the veracity of the results when they did have good news to report about one earlier stage drug, and helped them raise hundreds of millions in additional funding just a handful of months later.  While Clovis likely would have still succeeded either way given the result of the follow-on drug trial, it almost certainly would not have been to such a high degree if they had not handled the CO-101 failure so responsibly.

 

3.  Spend the money you have very carefully and treat every single dollar as if it was your last.

 

When small companies go public for the first time, there is a tendency for some to feel like they are relatively awash with cash.  They should not let that fool them into complacency.  The environment for raising money right now might actually be the best ever in biotech history, but that can change very quickly.  Some mistakes I am already seeing a few companies make are things like spending money on new programs that are outside of their focus, hiring large staffs that cannot possibly be sustained if a rainy day occurs, and conducting clinical trials that are too large for the size of their operation.  The hard earned money that public investors have given you is precious, so make sure you are spending it carefully.  Companies cannot count on money being as easily available in the future, so it is important to always be conservative and efficient with what you have. 

 

4.  Try to have a long-term plan.

 

As you might have noticed in the video clip of Alibaba’s Mr. Ma above, one of the things he talked about was doing right for shareholders over the next five to ten years.  While it is hard to see out that far on a program-by-program basis in biotech, having a general long-term plan is still a smart thing to do because it sends a signal that you care about shareholder value.  One example I like in biotech is NPS Pharmaceuticals (Nasdaq: NPSP).  You will often hear NPS’s CEO Francois Nader mention their “10-in-10” plan, or having ten new drugs approved in ten years.  Do I think they currently have any realistic idea how to get there…definitely not.  However, as an investor, I do respect the fact that their mentality is not geared towards gambling the future on just one or two things.  Many smaller companies could benefit from this type of thinking as well because it sends all the right signals to the market.  Investors do not deserve to see a company blow up quickly, even in biotech, so do not secretly roll the dice on their behalf in a way that could make it happen.

 

Conclusion

 

The Alibaba IPO, and specifically the amount of money raised, was very impressive.  What was even more impressive though was the way in which Jack Ma and his team have gone about it as professionals.  His comment on Friday about them not raising money, but trust and responsibility, is one of the best quotes I have heard from an executive in a long time.  If the CEO of the largest and most successful public offering in history is thinking that, you can bet it is a great thing for smaller companies to aspire to as well.  While money comes and goes, and both good and bad things in business are oftentimes out of your control, you usually only get one shot at trust and responsibility.  Always keep those two things front and center and life will be so much better off over the long run.

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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