Midatech Pharma (LON:MTPH)

Met the CEO & FD at Mello 2019 and conducted post Mello research.

First some context. I have no pharma background. Dislike the biotech business model. I'm generally not interested in pre-revenue firms.

Risks of Biotech

  1. Has a v v small chance of drug passing FDA approvals process, which always takes longer and costs more than anticipated. The approvals process has several stages so the chance of a drug making it from discovery to the market is typically less than 1% (please correct me if you know the actual statistic)
  2. Need marketing/distribution agreement with big pharma. There is no way for a tiny biotech which is sometimes even a virtual company can access a sufficiently big sales team without a distribution deal with major pharma.
  3. Need contract manufacturing agreement. Biotech drugs tend to be complex to make so manufacture is (I suspect) not a terribly competitive market.
  4. Vastly inflated estimation of market size/share. Always seem to be based on the overall sales of existing drugs rather than realistic segmentation or market share estimation.

All firms have huge risks and even if 1 is overcome, 2, 3 & 4 massively reduce potential profits. There's always lot's of talk about patents, platforms, in-licensing, out-licencing etc all of which tends to obscure the fact that they simply burn lots of money and in most cases for no reward.

For the first 30 years of my investing life I therefore avoided biotech. 

What Changed?

In 2013/14 I was lucky enough to have the time to investigate the sector properly. This coincided with a period in which, even allowing for all of the issues outlined above, some of biotechs appeared to be demonstrably cheap ie in the case of £GWPH the value of the firm was much lower than the amount of funding it had received over many years despite the fact that there had been no reverses in the trials process.

I bought Hutchison China MediTech (LON:HCM), $GWPH, Scancell Holdings (LON:SCLP). I still hold the first, sold the second before it moved to NASDAQ and was lucky enough to get out of Scancell near the top. All three were multi-baggers for me.

I have bought no biotechs since these three.

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