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.

The traditional "business case" for new features is an outdated exercise. Investors today, particularly in PE-backed SaaS companies, care about unit economics. They want to know how quickly every dollar spent on R&D will be recovered as revenue or profitability, a much more rigorous standard.

A third of small-to-mid-cap biotech firms are becoming profitable, with cash reserves projected to soar from $15B in 2025 to over $130B by 2030. This financial strength, combined with large-cap patent expirations, positions them not just as acquisition targets but as potential players in the M&A landscape themselves.

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.

A significant portion of biotech's high costs stems from its "artisanal" nature, where each company develops bespoke digital workflows and data structures. This inefficiency arises because startups are often structured for acquisition after a single clinical success, not for long-term, scalable operations.

Standard quant factors like expanding margins and avoiding capital raises are negative signals for development-stage biotech firms. These companies must burn cash to advance products, rendering traditional models useless. The only semi-reliable quant metric is Enterprise Value to Cash.

CRISPR's CEO suggests a specific financial rule: never spend more than 11% of market cap in one year. Spending above 14-15% risks a 'dilution spiral,' while spending only 6-7% means you aren't taking enough aggressive risks. This provides a clear guardrail for R&D investment.

In a capital-constrained market, positive clinical data can trigger a stock drop for biotechs with insufficient cash. The scientific success highlights an immediate need for a highly dilutive capital raise, which investors price in instantly. Having over two years of cash is now critical to realizing value.

Despite significant stock price increases (e.g., 3-4x for some names), the current biotech rally is not a sign of an overheated market. Many small-cap companies are still trading at a fraction of their potential value based on their pipelines, suggesting the rally is a recovery from deeply distressed, sub-cash valuations.