Unlike other sectors, a massive rally in a biotech stock often signals a significant de-risking event, such as positive trial data. This new certainty allows for more confident revenue projections, making it a potentially safer entry point despite the higher price.

The memo argues that the "hysteria of the bubble" compresses the timeline for building out new technologies from decades into just a few years. Patient, value-focused investing would never fund the massive, parallel, and often wasteful experimentation required to jump-start a new technological paradigm at such a rapid pace.

The recent rally in some biotech stocks is likely just the beginning. Key indicators of a full-blown bull market, such as a resurgence in biotech IPOs and a rally in large tool companies (e.g., Thermo Fisher), have not yet occurred, suggesting the cycle is still in its early innings.

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.

Analysis shows that the themes venture capitalists and media hype in any given year are significantly delayed. Breakout companies like OpenAI were founded years before their sector became a dominant trend, suggesting that investing in the current "hot" theme is a strategy for being late.

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.

A massive disconnect exists where scientific breakthroughs are accelerating, yet the biotech market is in a downturn, with many companies trading below cash. This paradox highlights structural and economic failures within the industry, rather than a lack of scientific progress. The core question is why the business is collapsing while the technology is exploding.

The biotech ecosystem is a continuous conveyor belt from seed funding to IPO, culminating in acquisition by large biopharma. The recent industry-wide stall wasn't a failure of science, but a halt in M&A activity that backed up the entire system.

The past few years in biotech mirrored the tech dot-com bust, driven by fading post-COVID exuberance, interest rate hikes, and slower-than-hoped commercialization of new modalities like gene editing. This was caused by a confluence of factors, creating a tough environment for companies that raised capital during the peak.