THE BLOG
09/28/2016 01:12 pm ET Updated Sep 29, 2017

Why Biotech Has Become a Magnet for Investors

This week, a tiny company called Tobira made headlines for its enormously profitable acquisition by pharmaceutical giant, Allergan. In this deal, Allergan will make an upfront payment of $28.35 per share in cash and up to $49.84 per share in Contingent Value Rights (CVRs). Based on their contract, Tobira could receive up to $1.695 billion for the two drugs the company has developed to treat NASH disease.

This story supports the current trend that biotech stocks are soaring; in fact, the biotech sector has rallied 15% in the last six months. But that's not the only consideration for investors. Much of their involvement with smaller pharmaceutical companies has to do with the potential for a quick and profitable exit.

While industries like consumer technology have a glamorous appeal, they are not the most efficient for investors. For a new company developing an app, for example, there are a lot of (expensive) variables that contribute to success, which go well beyond having a great product. There's business strategy, marketing, mass sales efforts - all of which demand higher overhead costs. It's no wonder that so many startups are burning through their investment capital as soon as they have it - Uber being the most recent example, reportedly losing $1.27 billion in the first six months of 2016.

But biotech companies developing new products are much different story. These smaller companies are able to generate just enough capital to develop a new product, using creative science. Once the science has been tested and approved, the product can be turned around and sold for a giant profit. That is exactly what J.David Hansen, CEO of MabVax Therapeutics Holdings, Inc. has been doing for the bulk of his career. He provided me with some insight into what it looks like on the inside of a biotech "startup."

Hansen has been on executive leadership teams for multiple medical startups and most notably was at Avanir Pharmaceuticals when Abreva was being developed. He recalls that at one point, it looked like the FDA was not going to approve this (now highly recognized) cold sore treatment and that, unfortunately, Hansen would no longer be able to pay his staff. "As an executive team, we put our heads together and built a case for the merits of the product and decided to draft an appeal," Hansen says. "We turned everything around, and ultimately the FDA wound up approving Abreva. Major pharma companies were knocking down our doors within days. I remember our stock price jumped 200 percent almost immediately."

Now with MabVax, a company that innovates products for the diagnosis and treatment of specific cancers, Hansen and his team are working to recreate past success. It appears to be moving in a positive direction, as MabVax has grew from $304,000 in 2014 to $1,267,000 in 2015 (roughly 300 percent over the span of a year). As of 2016, the company has cash on hand exceeding $10 million and it recently up-listed from the over-the-counter marketplace to the NASDAQ exchange. On September 15, 2016, analysts at Laidlaw & Company rated MabVax (NASDAQ: MBVX) a buy with a price target of $18 - more than triple its share price at the time.

Innovators in all industries could certainly learn a thing or two from biotech companies when it comes to managing capital. There's a certain culture among entrepreneurs that "perception is reality," but that's simply not true. Reality is reality. The key to the success the biotech industry has seen is based on keeping teams lean, knowing which costs are unnecessary, and which are absolutely crucial to developing the best product. In a time when startups have more access to capital than ever before and the pressure is high to be a "unicorn company" - it's easy to become a slave to media hype. But when you get your head down and create a truly life-changing product - the pay off is much more significant, leaving no use for hype.