Standard factor models (value, quality, momentum) are counterproductive for biotech stocks. Dan Rasmussen's research found that value must be redefined as market cap relative to R&D spend, where more spending is "cheaper," completely flipping the traditional logic used in other sectors.

It's a fool's errand to predict specific trial results. A robust quantitative approach to biotech focuses on underlying drivers and base rates. It positions a portfolio so the random, unpredictable nature of trial events plays out favorably over time, guided by factors like valuation and specialist ownership.

While broad biotech indices performed poorly, the past two years were manageable and even ideal for investors who were highly selective. The downturn created an environment for skilled stock pickers to identify high-quality companies that could withstand market pressures, proving that sector-wide performance is not the whole story.

Despite biotech comprising a significant portion of benchmarks, generalist managers consistently remain severely underweight. They perceive this as risk-averse, but it actually exposes their funds to massive tracking error and unintended risks by forcing them to be overweight in other healthcare sub-sectors.

The strong biotech market performance in 2025 was not a case of a rising tide lifting all boats. Outperformance was concentrated in companies with strong fundamentals and backing from specialist investors, indicating a healthy, discerning market that rewards quality over speculation.

Instead of hiring dozens of PhDs to analyze clinical trials, a quantitative firm can use the 13F filings of top specialist biotech hedge funds as a proxy for deep domain expertise. This "approved list" from experts can be modeled as a quantitative factor that has been shown to outperform.

In biotech investing, the collective wisdom of specialists is more valuable than any single expert's contrarian bet. Stocks owned by multiple specialists perform better, suggesting that an individual specialist's unique, high-alpha idea is more likely to be wrong than right.

Insider buying in biotech isn't just a short-term trading signal around an event. The quantitative analysis shows its predictive power lasts for months after the transaction. This implies insiders are buying based on a durable, fundamental belief in the company's science and trajectory, not just upcoming news.

In an scientifically inscrutable sector, the percentage of a company owned by dedicated biotech funds serves as a reliable proxy for quality. A complete lack of specialist ownership is a major red flag, suggesting the company is likely marketed to uninformed investors and may have poor science.