Risks investors

R D dollars pursue returns, and the risks investors will take to obtain those returns depend on how great they promise to be. To understand the drivers behind the pharmaceutical R D phenomenon of the 1980s, it is necessary to examine closely how the returns to these investments have been changing over time. Subsequent chapters of this report examine trends in the average cost of discovering and developing new ethical pharmaceuticals and the net returns to bringing these products to market. 

We conclude that although incorporating analysts opinions increases the riskiness of our portfolio, it yields significantly higher return per amount of that risk. Investor who trades off between the risk and return should therefore choose TRP-based strategy, as it will give him the highest reward for risk they take. 

Banks Banks are low-risk investors. They charge a much lower interest fee, but will typically want you to demonstrate a strong cash flow and profit or for you to put up security. Startups by definition typically do not have a history or profitable sales, so are unlikely to get a bank loan without putting up security (e.g., mortgaging your house). 

Finally, there is default risk, which is the risk that the financial condition of the issuer of the bonds (i.e., the borrower) deteriorates, and they are unable to make interest and/or principal payments. While there is little you can do to protect yourself against interest rate risk, investors can, to a large extent, insulate themselves from default risk by buying highly rated bonds. 

A first kind of these insurance products are called "catastrophe bonds" and consist in securitizing environmental risks in bonds, which could be sold to high-yield investors. The catastrophe bonds are able to transfer risk to investors that receive coupons that are normally a reference rate plus an appropriate risk premium. By these products, insurance companies limit risk exposure transferring natural catastrophe risk into the capital markets. In this way, with the involvement of the financial markets, their global size offers enormous potential for insurers to diversify risks. 

Weather derivatives are another kind of financial instrument used by companies to hedge against the risk of weather-related losses. Weather derivatives pay out on a specified trigger, for example, temperature over a specified period rather than proof of loss. The investor providing a weather derivative charges the buyer a premium for access to capital. If nothing happens, then the investor makes a profit. 

Surveys and interviews show that the attention paid to energy-efficiency investments in companies, public administrations and private households is often very low and heavily influenced by the priorities of those responsible for decision making (Ramesohl, 2000 Schmid, 2004 Stern, 1992). In other cases, project-based economic evaluations do not consider the relatively high transaction costs of the investor and also the substantial risks involved in the case of long-term investments both aspects may be decisive for small efficiency investments (Ostertag, 2003). 

The financial heart of a biotech story is a positive risk-adjusted net present value (rNPV). If the projected payback could happen very quickly, and if investors regarded a business plan as a sure thing (risk-free), then the "value" of the story would simply be the payback minus the investment. However, biotech paybacks do not happen quickly and are certainly not risk free. Hence, investors discount the payback value to reflect (1) the time value of their money and (2) the risk of failure. If discounted payback values are thought to exceed the required investments, stories get funded if this rNPV is perceived as negative, the flow of money stops. 

Of every 5000 medicines tested, on average, only 5 are tested in clinical trials and only 1 of those is approved for patient use." Very, very few biotech concepts yield commercial returns. Consequently, investors are hypersensitive to events which appear to shift the odds of success one way or the other. What drives biotech stock prices up or down is not changes in timelines, but rather changes in perceptions of the risk of failure. 

These plans envision composition-of-matter patents on drug molecules for which development timelines and market potentials can be estimated. Product stories are the clearest, most rational plans because profitable sales can be projected and rNPVs calculated. On the other hand, investors usually perceive higher risks because the rNPVs tend to be dominated by single product candidates for which historical failure rates are high. Examples of product stories include Amgen s development of Epogen and Amylin s development of Symlin. 

These plans envision assembling a portfolio of in-licensed drug candidates for which collective development risk is deemed to be relatively low. The idea is to in-license molecules that either are too specialized (small market potential) for large pharma or are not visible to their radar because they come from places like Eastern Europe. These stories are favorites of professional investors, because rNPVs can be calculated with relatively low development risk on the basis of demonstrated clinical utility and/or pipeline diversity. Examples include Dura Pharmaceuticals, who marketed prescription products that treat infectious and respiratory diseases, and Gilead who marketed antiviral nucleotides discovered in the Czech Republic. 

A question I am consistently asked about funding a biotech company is, "What kind of investor can afford to accept the extremely high technical risk of drug development while waiting 10 to 15 years for a product launch "... 

The answer is, no single investor can get the job done. Rather, funding a biotech company requires a chain letter strategy, whereby subsequent groups of investors achieve their target returns by passing the stock "baton" to the next level of investors as technical risks decline. 

Public investors purchase stock in IPOs or follow-on rounds after the technical risk has declined and the stock is liquid. Some of these investors expect to make their return when important commercial milestones are achieved, i.e., positive Phase 3 results, FDA approval, or financial breakeven, usually within a few years. Other investors are "momentum players" who hope to buy the stock on an upswing and get out before investor enthusiasm wanes, often within several months. Still other speculators enjoy playing the high volatility of biotech stocks, hoping to make returns within several days. 

The thing to remember is read the fine print in the term sheet. Do not be dazzled by a high premoney valuation if one of these hand grenades is built into the deal. If you permit them in, you can be sure that every subsequent round of investors will insist on equal terms, and the risk to common shareholders will escalate. 

The plan will eventually prescribe a likely filing date for a marketing authorisation application (MAA) (product hcence). This date is vital and when the plan becomes public information, any slippage in the date is likely to impact on the share price of the company. Accordingly, senior members of the company must be confident that the date can be met. There will always be pressure to bring the date forward but this has a cost in resources, and risks damaging credibility with investors if the accelerated timelines cannot be met. 

Earning interest on money invested is of utmost importance to the wise investor. Some funds pay a higher rate of interest but may be a bit risky. To offset the risk, the shrewd investor puts some money in a high-risk fund and the rest in a fund that doesn t pay as well but one that can be trusted to give a return and not lose any of the investment. 

Risks for rarely occurring events provide business for the Lloyd s Syndicate of London. Lloyd s is a consortium of wealthy investors who agree to back insurance contracts with their entire personal fortunes (unlimited hability) for such events as the loss of an opera singer s voice or an oil-tanker catastrophe. Lloyd s was a primary purchaser of corporate environmental liability reinsurance contracts, but it suffered many losses on those contracts and was forced to restructure itself in 1993, ending its 300-year history of unlimited personal liability (Raphael 1995). 

---