There wouldn’t be too many people more qualified to talk about investing in biotech companies than Steven Yatomi-Clarke.

For many years, it was his job as a director of corporate finance to determine which ones were the most promising — and then he jumped the fence to join one.

Mr Yatomi-Clarke was a director at Patersons Securities where he specialised in the biotech and healthcare sectors.

Now he’s the CEO and managing director of Prescient Therapeutics (ASX:PTX), a firm that’s trying to find new ways to treat cancers that have become resistant to front-line chemotherapy.

As more young Australians turn to the ASX instead of real estate, we asked Mr Yatomi-Clarke for some advice to give first-time investors on how to spot a decent biotech stock.

“Biotech companies can be challenging to value, requiring a knowledge of science and the drug development process,” he told Stockhead.

However finding a biotech that proves successful can provide strong returns in the long run.

“In addition to tackling disease and providing better outcomes for patients, successful companies can produce incredible value for their shareholders.”

Below are Mr Yatomi-Clarke’s top five tips on what to look for, and what to avoid, when trying to look for a promising biotech company.

It’s important to note that this article is for introductory purposes only, and doesn’t cover all the topics necessary to appropriately evaluate a biotech company.

It does not constitute investment advice, and you should consult a professional financial advisor before making any investment decisions.

Prescient Therapeutics boss Steven Yamoti-Clarke. — Prescient Therapeutics boss and former Patersons director Steven Yatomi-Clarke. Picture: Supplied

Five things to look for in a biotech

1) Technology backed by strong scientific validation

When a company is in early pre-clinical stages, publication on its technology in peer-reviewed journals is an important indication that the technology is valid and has a solid scientific foundation.

Look for peer-reviewed papers that describe the technology’s mode of action (how it works) and pre-clinical models which demonstrate proof of principle and safety.

While companies cannot guarantee trial outcomes, they can and should build on a strong foundation of preceding scientific work.

It’s much easier to feel comfortable and confident with your investment when you know the company’s technology is well-grounded and credible, and has withstood the rigour of peer review.

2) Clinical trials being conducted

If a drug is at the clinical trial stage, it means it has passed pre-clinical testing to demonstrate proof of concept, and is now being evaluated in humans for additional safety and efficacy data as part of a more advanced study.

For most companies, clinical trials are where the rubber hits the road. Companies at this clinical stage should have weeded out the programs that have failed in pre-clinical studies.

Once in these clinical stages — Phase I, II, and III — it is important to ensure that the company is designing the trial intelligently, with integrity, and reporting the trial results to the public with complete transparency.

The endpoints of a clinical trial are essentially the hypotheses that the trial aims to prove. For companies about to embark on a clinical trial, ask the question of companies and analysts: “Are the endpoints realistic and achievable?”

For companies reporting trial results, ask of them: “Did the trial meet its main endpoint, or are they attempting to distract us from unfavourable results by highlighting less significant findings from the trial?”

3) Multiple drugs or programs

With any investment strategy, diversification is critical — and the same can be said with a biotech company’s approach in developing new drugs.

You want to make sure the company you are investing in has more than one drug or development program it is focused on, so that if one fails, there’s always another to fall back on.

Having a diverse portfolio of programs also has the advantage of providing multiple inflexion points for the company over time. In other words, multiple drugs and/or programs can provide multiple shots on goal.

4) Catalysts that are in sight

The drug development process takes many years and requires patience and resilience. For those investors who are less patient, a good time to buy into a company is when you believe the outcome of their activities are about to have a big, positive impact.

It’s favorable for a company to prove that catalysts are imminently approaching, and if they can, that usually indicates a good time for exposure.

5) Experts and track records

Beyond reviewing the available company materials, do your own research and look for evidence of reputable scientists and/or medical experts that are willing to advocate for the company and its research.

Also to find out if they were paid to endorse the programs, or if their endorsements are truly independent.

It is also important to look at the individuals involved with the company at a management and board level, ensuring their experience is relevant to the company’s strategy, that they have a complementary and diverse skill set, and determining whether they have a proven track their track record of success in designing trials, negotiating partnerships and creating value for shareholders.

A clean lab is probably a bonus, but we doubt you’ll be able to check for that. Picture: Getty

Five things to avoid in a biotech

1) Failing to disclose operational risk

Almost all biotech companies can paint a very compelling story of the upside. However it’s important to be wary of companies that are not upfront and transparent about the spectrum of risks facing their operations, and a delineation of the risks they can and cannot control.

Don’t be afraid to actively ask this of companies: “What are the main risks and which can they control? How is the risk managed?”

If you sense any ambiguity in these risks, be very cautious about why the company doesn’t appear to be offering full disclosure. It probably means they are unrealistic expectations of risk themselves.

2) Not rushing to find an answer

Given the biotech industry is focused on discovery of new drugs and this process takes a long time, it’s entirely possible that a company will take longer than expected to find answers to the problem it’s working to solve.

Take note of timeframes which continue to stretch out or be re-set, as this could indicate the company isn’t really in a hurry for an answer at all (probably for fear of an unfavourable result).

To further distinguish companies that are motivated to drive development from those riding the gravy train, focus not just on timelines, but on the richness of their work program, and the progress of this work program.

Be especially wary of companies with a history of not delivering on their promised activities.

3) Focusing on poorly understood diseases

It is totally admirable for companies to address challenging diseases, and unfortunately many of these diseases are still poorly understood.

However purely from an investor’s perspective, it can become dangerous when exposed to a company targeting diseases whose mechanisms are still being elucidated. In other words, it can be much riskier trying to understand how a drug might work when scientists still don’t have a firm understanding of the pathology of the disease itself.

New frontiers in neurology and some metabolic diseases may fit this category. When first investing in the sector, you can remove an entire degree of variability by focusing on companies addressing diseases that are more deeply understood.

4) Lack of fuel in the tank

Almost all ASX-listed biotech companies lack revenues — they are purely research and development companies. For such companies it is therefore important to assess the timing of key catalysts and whether the company has sufficient funding to meet those milestones.

In addition to assessing the company’s balance sheet and burn rate, you should also determine whether meeting future milestones will allow the company to raise additional funds at that time, and from whom.

Ideally they have a mix of institutional, retail and high-net-worth investors on their register who are supportive and willing to meet future funding requirements — if they don’t have this support, or look likely to fall short of key catalysts due to a lack of funding runway, then you are best to stay clear of these companies and reassess once they have addressed their funding issues.

5) Poor patent position

Patents are the real assets of a biotech company. Be wary of companies who do not have patents granted — they may just be applications, and they may not be granted in key jurisdictions.

Furthermore, patents may not have long before they expire. A company without a solid intellectual property portfolio may not have an adequate “moat” around its business, which can attract unwelcome competition and erode margins.

I hope you find this short list helpful in starting to navigate the world of biotech investment — and before you make any investment decision, make sure you consult a qualified adviser.

— Steven Yatomi-Clarke

This article is for introductory purposes only. It does not cover all topics necessary to appropriately evaluate a biotech company. It does not constitute investment advice and may not be relied upon for any investment decisions.

Always seek advice from your accountant, stockbroker or professional financial advisor before making any investment decisions, who should take into account, inter alia, your personal financial situation, objectives and risk profile.

The author disclaims all responsibility for any losses incurred from investors.