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.
For pre-revenue biotech firms, value can be anchored to total cash spent on R&D and operations, not profits. A lower market cap relative to this cumulative "spend" indicates a cheaper company, flipping the traditional value investing mindset on its head and providing a powerful quantitative factor.
In biotech, CEO insider buys are common and not very predictive. The real signal comes from the rest of the management team, especially the CFO. CFOs are typically more bearish and financially disciplined, so their decision to buy company stock is a particularly strong vote of confidence.
High-conviction shorting in biotech is dangerous due to promotional news and massive upside catalysts. A quantitative approach, diversifying shorts across many names with negative signals, provides better risk-adjusted returns than a few concentrated, "fraud" bets that have burned fundamental managers.
Rather than using static categories like "oncology," biotech firms can be dynamically grouped based on the similarity of their entire clinical trial portfolios. The collective momentum of this custom "peer group" is a predictive factor, capturing thematic investor sentiment around specific scientific approaches.
Verdad Capital's research shows biotech stocks heavily owned by multiple specialist funds significantly outperform those with none. This "consensus" among experts acts as a powerful quality screen in a sector where traditional financial metrics are useless, as stocks with zero specialist ownership generate near-zero returns.
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.
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.