Thoughts on Speculative Investments like PAR

Just thought I’d document the way I think about speculative investments (low or no revenue) like this to hopefully:

1) Clarify my thinking

2) Coax out more thoughtful / experienced views on this topic…

As always, looking to separate a) the business and b) the investment opportunity in my thinking to assess each separately before combining these to inform a decision.

Firstly, unless it has a very large potential (big market, big head start, genuine barriers to entry, etc) it’s not worth looking at due to poor risk reward trade off – i.e. high risk for insufficient potential reward.

Ditto if the business (or a very simple but realistic thesis for the opportunity) is too far outside my circle of competence – move onto something that isn’t.

Process

Having a Written Trackable Thesis for every investment is important but even more so for a high risk / pre-revenue style investment – so you can wait for thesis triggers to get hit / inflection points to emerge.

If you have an effective way of tracking your watchlist / bench, you may not need to take a small ‘research position’ in a business to track it over time.

That could be the best way to track more speculative businesses so you don’t clog up your portfolio with them, as they can be a distraction from the main game.

Real Options

Some of these speculative investments can be thought about as Real Options – and their equity treated as more like premiums on equity options than ordinary shares.

Aswath Damodaran has covered Real Options in his books and this lecture https://www.youtube.com/watch?v=DwouwkQZ7hg

With Slides here: https://pages.stern.nyu.edu/~adamodar/podcasts/valspr20/session22slides.pdf

Paradigm

Real Options is how I think about PAR. I took a very small position (that is now down > 40%) as their trials progressed and their financial situation deteriorated.

Best outcome here is that before they run out of money they have a great trial result or enter a testing / distribution partnership to de-risk the business BEFORE they raise funds via a SPP (they’ll want to announce something positive before they raise to minimise dilution). Then I can use my small stake (premium) to take up to $30k at a discounted (strike) price.

What are the odds of this? Don’t know but they’re not zero.

Downside for me is less than the impact of a 0.2% fall in my portfolio – a forgettable day in the market.

Upside is speccy equity upside – i.e. huge because this drug is a potential game changer in a massive  market with no equivalent competition (yet).

Reality intervenes

I mentioned on SM previously that PAR is a reminder that you need more than a high potential product and pathway to market. You also need effective capital allocation to ensure that equity holders actually participate in eventual success, should it eventuate. Otherwise dilution or getting taken out cheap when vulnerable will see value accrue elsewhere.

In this instance it feels like PAR is now at the mercy at the market – and a lot will need to go right.

They're pretty vulnerable now and I think the odds of a SPP have fallen a lot - they need a big de-risking event that doesn't dilute current holders massively and the clock is ticking louder as each month passes without a breakthrough in trial results or non-dilutive partnership.

If they don't keep slashing their cash burn rate each quarter until their next R&D rebate hits, they'll be out of cash in about 6 months...

Held: 0.2% position

@GazD

i learnt that lesson several times. Or rather I didn’t learn it several times and then did!

The risks with these types of companies is the potential downside. It’s a binary outcome and there is little way to accurately predict what the phase 3 will show.

I have avoided all biotech companies for about 10 years as a result of a string of bad outcomes, with complete or near complete loss of funds.

I guess it depends on what stage in life you are at, but whilst I am on the look out for a large upside potential I am very much looking at downside protection. Heads you win, tails you don’t lose, or don’t lose much.

Maybe if I had picked one low probability, huge upside winner I would have learnt the opposite lesson!

I am keenly awaiting the result of that phase 3. As are my knees.