I like taking a hypothesis-driven approach when it comes to investing. While my primary investment focus is on next-generation genomics companies aimed at curative therapeutics, early-stage diagnostics, or bioinformatics, the scientific method can be used in any scenario. As a trained research scientist, the scientific method offers a great framework to conduct research, test a hypothesis, and “troubleshoot” a hypothesis if a company does not seem to be doing what I expect it to do.

Biotech companies, in particular, already have intrinsic risks as we never know what the science will conclude; however, other variables can be controlled for. One useful strategy I’ve been able to leverage is focusing on platform technologies and identifying current technological pain points. This top-down approach has allowed me to identify technological trends and companies that are expected to do well in a few years’ time.

For example, while Illumina (NASDAQ: ILMN) is a DNA-sequencing behemoth, conducting cost-decline analysis of short-read and long-read sequencing indicated that Pacific Biosciences (NASDAQ: PACB) would become crucial in diagnosing rare diseases with its new chip architecture. Focusing on platform technologies enables me to quickly and efficiently rule out companies that are not adopting the latest technologies. Many times, these new technologies cut the cost of production and make research faster and/or more accurate. From here, conducting a bottoms-up analysis on companies is more streamlined.

Biotech is constantly evolving and incumbents are not always going to remain winners. I learned early on in my investing career that the only way to feel confident about your investments is to conduct extensive market research, analyze addressable markets and future trends, talk to management companies, experts, and read scientific journals to see what is coming down the pipeline. The key is to increase productivity, whether it’s research productivity or “time-to-answer” for diagnostic tests.

I tend to follow the scientific method because I can test and re-test my hypotheses and quickly identify where my thesis may falter before it’s too late. When I first started investing, these high-risk biotech companies would keep me up at night. In reality, the stock market will always be volatile, but I would rather be uniquely wrong than following herd mentality. I doubled down when Kite Pharmaceuticals (KITE) and Juno Therapeutics (NASDAQ: JUNO) traded down over 30% after reporting patient deaths.

Just a few months later, each were acquired at $12 billion and $9 billion, respectively. While the market was terrified at the notion of patient deaths, it was important to put the deaths in context: These were extremely sick cancer patients who had already failed more than 5 lines of therapy. If they did not receive KITE’s or JUNO’s experimental drugs, they simply would have been waiting on their deathbeds. Further, while patient deaths are saddening, when put into context, these drugs also resulted in complete remission rates for a larger majority of their clinical trial patients.

We have to be patient with these companies while staying vigilant. The scientific method has helped me put each of these companies into perspective.

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