How to identify biotech diamonds in the rough

Discipline, experience and caution required

There are currently 150 Nasdaq-listed biotechnology companies trading at an enterprise value of or below zero, where the value of the company is equal to or less than the amount of cash on its balance sheet. This is the greatest number of businesses in this situation in the sector for 15 years.

While it may seem valuations are likely to stop falling at this level, this is not necessarily the case in biotech. Typically, these early-stage companies are yet to have a product approved, and they subsequently rely heavily on external backing to fund the development of new treatments. This makes these sorts of companies particularly risky prospects for investors in the biotech space. However, among companies whose values have dropped 70-80% from their peak levels in the spring of 2021 are some gems, with compelling science and sound underlying business fundamentals. 'Big Short' Bur...