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Interacting with Members and Refining My Frameworks

Speaking with members has helped me to fine-tune my research process with clearer communication in mind.

February 22, 2022

Writing prompt for this Perspective: “What is one specific thing about your investing process that has noticeably improved since joining 7investing?”

One of the great things about 7investing is the emphasis on research. I have more time than ever to sit with complex subjects, map out evolving competitive landscapes, and jostle thoughts around in the ol’ noggin. These benefits were what ultimately motivated me to join the team.

What I couldn’t appreciate was how interacting with members would play into the process. While it’s true that members can speak directly with the lead advisors – something quite unique for a financial platform – the team of lead advisors also gets to interact with you. It’s not a one-sided relationship!

How does this two-way interaction help? Well, one of the downsides of being immersed in the research process is that it becomes all too easy to gloss over seemingly rudimentary dynamics in your field of expertise.

Take the 7investing risk categories as an example. Every precommercial drug developer I’ve recommended has earned the “Very High Risk” label – the highest available – but “Very High Risk” isn’t very helpful. Some of these companies are more attractive than others, but without ways to communicate relative conviction or suggest position sizing, members weren’t getting much information value from risk labels alone.

That realization forced me to refine my own framework for evaluating risks of precommercial drug developers, which led me to more clearly communicate the nuances that go into each “Very High Risk” label. Members now receive color-coded risk rankings across five fixed categories, as well as unique risks on a company-by-company basis.

  • Development risks: From 2011 to 2020, only 8% of drug candidates that entered phase 1 clinical trials reached the market. The other 92% faced insurmountable safety and efficacy concerns. These are usually the risks investors are referring to when they say “drug development is risky.”
  • Regulatory risks: A drug developer isn’t always on the same page as regulators. The FDA can require additional studies to collect more data, long-term patient monitoring, or other things that slow down development.
  • Commercial risks: After a drug candidate earns approval, companies must navigate challenges spanning drug pricing, insurance coverage, competition, and more.
  • Dilution risk: Drug developers often need to make significant R&D investments before generating revenue. Making matters more complicated, a business will usually lose more money in the first few years of launching its first drug product on the market. How much will dilution erode the benefits of long-term investing?
  • Valuation risk: Valuations are determined much differently in biotech than in other industries. Unfortunately, many biotech valuations soared to unsustainable heights in 2021. Investors must remember that they’re investing in businesses, not technologies. It’s important to understand what prices are attractive and what prices may diminish future returns.

Some members may hesitate to ask the “dumb question,” but there really isn’t such a thing in investing. If something is unclear in our work, then don’t be afraid to ask for clarification or communicate your lack of comprehension. The next “dumb question” might catalyze the next iteration of our research frameworks and make everyone a better investor, including me.

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