UCLA scientists' biotech firm to be acquired by pharmaceutical corp. / UCLA Newsroom - Sent Using Google Toolbar

UCLA scientists' biotech firm to be acquired by pharmaceutical corp. / UCLA Newsroom

UCLA scientists' biotech firm to be acquired by pharmaceutical corp.

Acquisition will make faculty-founded company one of L.A.'s largest private biotechnology firms

Roxanne Moster, Rachel Champeau
| 11/27/2007 1:50:48 PM
A business success story has both UCLA and a team of enterprising UCLA scientists envisioning a brighter future for cancer research and patient care.
In 1996, a unique collaboration of leading UCLA scientists led by Dr. Arie Belldegrun founded the biotechnology company Agensys Inc. — and the company now stands to reap $537 million through an acquisition by Astellas Pharma Inc., making it one of the largest Los Angeles-based private biotech firms poised to tackle therapeutic, fully human monoclonal antibody oncology research and drug development.
According to Astellas, the acquisition will enable Agensys to become the cornerstone of the company's biologics efforts and will allow the Agensys team to accelerate its discovery and commercial efforts while working to achieve the vision of building a global leader in biologics and oncology.
Agensys, originally known as UroGenesys, was created with $8 million in seed money from private donors and "angel investors," many of whom were grateful patients of the UCLA physicians who had helped spur the development of novel gene-based therapies for prostate cancer, the most common cancer in men.
"As clinicians and scientists, we wanted to build on the discoveries made in our individual labs to help move cancer research forward from the bench to the bedside," said Belldegrun, founding chairman of Agensys, professor and chief of urologic oncology in the department of urology at the David Geffen School of Medicine at UCLA, and a researcher with UCLA's Jonsson Cancer Center.
The UCLA scientists worked with former president and chief executive officer of Teledyne Technologies Dr. Donald B. Rice, who became CEO of Agensys. They were joined in 1999 by Dr. Aya Jakobovits, who helped develop monoclonal antibody technology at the company. Today, Agensys specializes in the discovery of proprietary targets for a variety of cancer indications and in antibody product development, manufacturing and clinical testing.
Technology developed at UCLA using lines of patented Xenograft mice that can carry and grow human tumors has led to cutting-edge research and drug development for prostate, kidney, bladder and other urologic indications. According to Dr. Owen Witte, director of the Eli and Edythe Broad Center of Regenerative Medicine and Stem Cell Research at UCLA, who served as founding chairman of the Agensys scientific advisory board, the technology has also been applied for a variety of other types of cancer — including pancreatic, lung, colon, breast and ovarian cancers — which inspired the company's name change to Agensys in 2001.
"We are pleased that our faculty, in addition to regular duties pursuing research, patient care and teaching, were able to bond together and start this biotech company that is now well positioned to become a major player in Los Angeles and the world for drug development," said Dr. Jean DeKernion, chief of the department of urology at the Geffen School of Medicine and a founding director of Agensys.
UCLA was an initial partner in Agensys. Several patents — including those for the Xenograft line series (LAPC) and the prostate stem cell antigen (PSCA) tumor target developed by the UCLA scientific founders of Agensys — were licensed to the company from UCLA. Today, more than 300 patents have been generated from the LAPC tumor model, some of which have been licensed to pharmaceutical companies around the world.
In addition, the fundamental patent for PSCA, a cell surface marker overexpressed in prostate cancer patients, was also licensed and serves as the basis for the initial products in the Agensys pipeline. In a groundbreaking step for the university, UCLA took equity as partial consideration for this licensing agreement.
"The creation of Agensys exemplifies the creativity and drive of UCLA's faculty entrepreneurs," said Kathryn Atchison, UCLA vice provost for intellectual property and industry relations. "UCLA's premier scientists represent the new scientists of the 21st century. They act not only as scientists to create new knowledge, they also work as entrepreneurs to assure that breakthrough technology moves toward product development."
According to Belldegrun, the acquisition of Agensys by Astellas Pharma is a promising example of what can be done when entrepreneurial efforts by UCLA medical faculty are encouraged to blossom.
Venture capital investments in Agensys have come from premier groups such as Orbimed Associates, Alta Partners, Bear Sterns Health Innoventures, JAFCO, H&Q Healthcare, Duquesne Capital Management Co. and HBM Bioventures.

Agensys | Press Releases - Sent Using Google Toolbar

Agensys | Press Releases

stellas to Acquire Agensys, Inc.


Japan, November 27, 2007 - Astellas Pharma Inc. ("Astellas"; headquarters: Tokyo; President and CEO: Masafumi Nogimori) today announced that its US subsidiary, Astellas US Holding, Inc. (headquarters: Deerfield, IL) has signed a definitive agreement on November 26, 2007 (US time), to acquire Agensys, Inc. ("Agensys"; headquarters: Santa Monica, CA; Chairman, President & CEO: Donald B. Rice, Ph.D.) for $387 million up front assuming approximately $30 million net cash balance at closing.  In addition, Agensys' current shareholders will retain the right to receive a maximum of $150 million in accordance with Agensys' achievement of various milestones.


Agensys is a biotechnology company specialized in therapeutic antibody research and development in cancer.  It has selected candidate targets by applying differential gene expression technology to human tissues and identified 30 proprietary targets in 14 cancer types.  It has rich experience in using its optimized hybridoma method* to generate fully human monoclonal antibodies, including to challenging targets, from XenoMouse® a human antibody-producing transgenic mouse in-licensed from Abgenix (currently a part of Amgen).  It also has GMP manufacturing facilities producing investigational antibodies for pre-clinical and early-stage clinical studies.  Agensys' pipeline includes an antibody in a Phase Ib clinical trial and several candidate antibodies in late preclinical stage.


Mr. Nogimori said, "Astellas will continue to build our company into a strong, global pharmaceutical leader.  Agensys will be the cornerstone of our biologics efforts and an integral component of building our oncology efforts within our franchise.  We welcome Agensys employees to the Astellas family."


Astellas, in its medium-term plan, has declared that it will aggressively build up its antibody R&D capabilities.  Astellas acquired a non-exclusive license to Regeneron's VelocImmune® Technology and an access to phage display library from MorphoSys both in March 2007.  It further reinforced its basis of antibody research through establishment of Advanced Biologics Section in Molecular Medicines Research Laboratories this October.  Astellas believes that this acquisition of Agensys will provide Astellas access to expertise and assets in fully human monoclonal antibody technologies, proprietary target molecules in the cancer field, and clinical candidate antibody pipeline.  The combined company will reinforce and accelerate Astellas' antibody R&D in cancer, one of the important research therapeutic areas.  Target molecules proprietary to Agensys are also expected to contribute to Astellas' in-house small molecule oncology drug discovery.


Dr. Rice said, "This transaction represents a rare combination of a deal that is a win for our investors, for Astellas, and for Agensys employees.  It is a real tribute to the accomplishments of the Agensys team.  We were attracted by Astellas' desire to build on the core Agensys team to accelerate our discovery and commercial efforts, while working together to achieve our shared vision of building a global leader in biologics and oncology."


The pharmaceutical market in cancer treatment was approximately ¥1.7 trillion as of 2005 and is expected to double to approximately ¥3.4 trillion by 2015.  Among these, new treatments such as antibodies, molecular targeted drugs and nucleic acid agents will expand rapidly and are anticipated to represent half of the market.


Upon completion of the transaction, a newly established subsidiary of Astellas US Holding, Inc. shall be merged with and into Agensys and Agensys shall become a wholly owned subsidiary of Astellas US Holding, Inc.  The closing of the transaction is subject to Agensys shareholder and customary regulatory approvals, but is expected to take place by the end of December 2007.  Montgomery & Co. LLC is acting as financial advisor and Morrison & Foerster LLP is acting as legal counsel to Astellas in this transaction.  J.P. Morgan Securities Inc. is acting as financial advisor and Latham & Watkins LLP is acting as legal counsel to Agensys in this transaction.


*Hybridoma method

Method to generate monoclonal antibodies by hybridoma, which is derived by cell fusion of an antibody producing B cell and myeloma cell.


About Agensys



Agensys is a private biotechnology company located in Santa Monica, CA.  It began operations in 1997 as UroGenesys, founded by oncologists at UCLA and Dr. Rice, joined by Dr. Jakobovits, an inventor of XenoMouse® at Abgenix, in 1999 as CSO.  The company changed its corporate name to Agensys in 2001.  There are approximately 100 employees.  Agensys discovers proprietary targets using tumor tissues derived from patients and has already identified 30 proprietary targets in 14 cancer types.  It has expanded its oncology research focus from urology to a broad range of cancers and also its business from target discovery to antibody product development, manufacturing, and clinical trials.  Agensys' pipeline includes therapeutic naked antibodies and antibody drug conjugates.  It licenses out targets and antibody products in early stage clinical development, and is jointly developing them with partners, while retaining a robust pipeline for its own account.


Name:                          Agensys, Inc.

Management:                Donald B. Rice, Ph.D. (Chairman, President & CEO)

Aya Jakobovits, Ph.D. (Senior Vice President, Technology and Corporate Development, Chief Scientific Officer)

Paul G. Kanan (Vice President of Operations, Chief Financial Officer)

Christopher J. Morl (Vice President, Business Development)

Martha E. Vincent, Ph.D., FACCP (Vice President, Clinical Research and Development)

Location:                      Santa Monica, CA

Date of establishment:   September 6, 1996

Number of employees:        approximately 100



·    Identification of cancer target molecules

System of high-quality target molecule identification has been established.  Bank of high-quality patient-derived tumor and healthy tissues has been constructed in-house, obtained from multiple suppliers.  Following selection of candidate targets through differential gene expression profiling of tumor tissues from different disease stages and healthy tissues, it is verified via immunohistochemical staining using tissue arrays, in vitro / in vivo functional analysis using siRNA, antibody and other reagents.


·    Xenograft model using tumor tissues derived from patients

Xenograft models using tumor tissues derived from patients have been established for multiple major cancer types.  The models are used to evaluate drugs for targets highly expressed in tumor tissues derived from patients but having no or limited expression in established tumor cell lines.  They also better represent clinical conditions  of the human cancers.  Regarding prostate cancer, it is protected by patents in the US and Europe, and Agensys holds an exclusive license.


·    Fully human monoclonal antibody technology

High affinity monoclonal antibodies are routinely generated from XenoMice in-licensed from Abgenix (currently a part of Amgen) using hybridoma methods optimized by Agensys. High-throughput screening is adapted to hybridoma screening.


·    Antibody drug conjugate technology

Agensys has licensed Seattle Genetics' proprietary linker-toxin technology, licensed from Seattle Genetics, for development of therapeutic antibody drug conjugates.


·    Antibody production

Facility including cell culture instruments and purification instruments in accordance with GMP is available.  Its MAb manufacturing capability is enough to cover clinical trial material supply for Phase I trials and early Phase II trials.




Contacts for inquiries or additional information

Astellas Pharma Inc.

Corporate Communications

Tel: +81-3-3244-3201   Fax: +81-3-5201-7473


Astellas’ $537M Buy of UCLA Spinout Agensys Benefits School; May Buoy LA Biotech Sector - Sent Using Google Toolbar

Astellas' $537M Buy of UCLA Spinout Agensys Benefits School; May Buoy LA Biotech Sector

Astellas' $537M Buy of UCLA Spinout Agensys
Benefits School; May Buoy LA Biotech Sector

[December 3, 2007]


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Michael Gutch

By Ben Butkus

Japanese pharmaceutical company Astellas Pharma last week said that its US subsidiary has acquired Agensys, a University of California-Los Angeles spinout, for $387 million up front plus a maximum of $150 million in potential future milestone payments.
UCLA and the University of California system, which hold an undisclosed equity stake in Agensys, will as a result receive a portion of the upfront payment and any future milestones, making it one of the most lucrative tech-transfer deals in the school's history.
Officials said the acquisition may also represent a big win for the LA-area biotech industry – oft overlooked in favor of the San Diego and Bay Area biotech corridors – as Astellas plans to retain Agensys as an operating subsidiary in LA suburb Santa Monica.
Agensys, originally known as UroGenesys, was founded by a group of UCLA scientists in 1996 with approximately $8 million in seed funding from private donors and angel investors. UCLA took an undisclosed equity stake in the company in exchange for a license to university-developed technologies.
Agensys' specialty is its pipeline of therapeutic fully human monoclonal antibodies to treat solid tumor cancers based on its own proprietary targets, some of which were discovered in the laboratories of UCLA scientists, and some of which were discovered by the company.
Over the past 10 years, UCLA has reaped an undisclosed but "significant" financial return from the company in the form of licensing and milestone payments related to various development milestones and deals between Agensys and other companies, and could continue to garner such payments in the future, Arie Belldegrun, professor and chief of urologic oncology at UCLA and one of Agensys' co-founders, told BTW last week.
According to Belldegrun, Agensys' lead product is the prostate stem cell antigen, or PSCA, tumor target, which Agensys licensed from UCLA early on, advanced farther down the pipeline, and then used as the basis for an approximately $17 million deal with Merck to co-develop a humanized antibody that it signed in 2005. Belldegrun said that if a drug based on that target hits the market, UCLA will receive royalties for an undisclosed number of years.
"The different thing we have done from other companies is to not build a one-drug or two-drug company," Belldegrun said. "We wanted to start with a broad base and do something like Genentech.
"We started [by] discovering multiple genes and have generated over 300 patents; validated those; and then decided that everything [with] a surface molecule that we can generate antibodies against, we will develop in house," Belldegrun added.
Agensys has outlicensed all IP related to genes in which it had no interest or expertise. In addition, the company has over the years developed a modest pipeline of vaccine technologies that didn't really fall in its wheelhouse. Beldegrun said that the company has licensed these types of technologies to companies such as Genentech, Seattle Genetics, and Sanofi-Aventis.
Meantime, Agensys continued to develop technology and expertise in humanized antibodies, and currently has potential targets for 10 to 14 cancer types in its portfolio – including the PSCA technology – which is what attracted Astellas to the firm, according to Belldegrun.
"Astellas was looking for more than just one or two molecules," Belldegrun said. "They were looking for an infrastructure to continue to develop a biotechnology platform at Astellas, and they are getting a full workforce with experts in antibody and gene discovery; and expertise in large-scale production in GMP facilities that we built in order to produce these antibodies."
Masafumi Nogimori, Astellas' president and CEO, said in a statement that "Agensys will be the cornerstone of our biologics efforts and an integral component of building our oncology efforts within our franchise." Astellas also said that its medium-term plan is to "aggressively" build up its antibody R&D capabilities, and that the addition of Agensys will provide access to expertise and assets in fully human monoclonal antibodies, proprietary cancer targets, and clinical antibody candidates.
'Enormous' Deal for UCLA
It is unclear what the exact financial return to UCLA will be from the acquisition of Agensys, but according to Kathryn Atchison, vice provost for intellectual property and industry relations at UCLA, the deal is "enormous" for the school and certainly one of the biggest financial success stories in its history.

"From the standpoint of taking equity, our goal was to really show the faculty and the investors that we are a partnership, and that it's not that this is only about the money. If we really just wanted to go for the money, we would [have] licensed these [technologies] to a large company and taken large payments."
Belldegrun added that the up-front acquisition payment easily eclipsed the value of any previous licensing deal that Agensys had consummated involving technology that had originally been developed by UCLA researchers.
Atchison also said that the deal is particularly rewarding because Agensys was the first company in which UCLA took an equity stake after the UC Office of the President began allowing schools to do so in the mid 1990s.
"From the standpoint of taking equity, our goal was to really show the faculty and the investors that we are a partnership, and that it's not that this is only about the money," Atchison said. "If we really just wanted to go for the money, we would [have] licensed these [technologies] to a large company and taken large payments."
Instead, she noted, UCLA granted the license to Agensys in 1996 in exchange for equity.
"We've been working on this partnership for 11 years, so it's not like we ever count on money," Atchison said. "The success rate of start-up companies [is low]. We're all celebrating that one of our startup companies has made it. They're already approaching Phase II clinical trials for some therapeutics, so we're hoping there will soon be some excellent products coming out in the prostate cancer market."
Some of those potential products will likely be produced at Agensys' facilities in Santa Monica, as Astellas said that it plans to fold the approximately 140-person operation into its US subsidiary, currently based in Deerfield, Ill.
In an e-mail to BTW, Astellas corporate communications representative Saori Furukawa wrote that "Astellas will utilize the current R&D infrastructure of Agensys intact. Agensys will become a part of Astellas' research organization. The combined team will continue to pursue efforts to optimize research productivity."
Therefore, the impact of the deal may be even more significant for the biotech industry in Los Angeles, which has long lived in the shadow of biotech success in San Diego and San Francisco, according to UCLA officials.
"[Astellas] spun out a [US] subsidiary, and then merged that into Agensys," Earl Weinstein, assistant director of business development and licensing at UCLA, told BTW. "They will have a fully operating subsidiary right in Los Angeles; actually, right in Santa Monica, which is unprecedented. For the LA region, this is really the first time there has been a big pharma acquisition like this. It's a huge step for this region."
Atchison said that UCLA, in collaboration with area universities such as the California Institute of Technology and the University of Southern California, have been making a concerted effort to grow their tech-transfer activities, particularly in the biosciences, over the past several years.
"This is something the mayor's office is working on and these three universities have bonded together on," Atchison said. "We're all trying to better publicize the biotech industry that is in LA and never gets recognized for being as prominent as it is."
Added Belldegrun, "I think that the chancellor's office and UCLA are waking up to the fact that they need to do much more than they've been doing. They've done quite well in past years, but I think that right now things are moving very rapidly to streamline the whole idea of patenting and IP."

News | Alta Partners - Sent Using Google Toolbar

News | Alta Partners

Agensys Agrees To $387M Acquisition By Astellas

November 28, 2007 - VentureWire Life Science

By Lorie Konish

Cancer antibody therapies developer Agensys Inc., which has raised about $119 million in venture capital, has entered into a definitive agreement to be acquired by the U.S. subsidiary of Astellas Pharma Inc. for $387 million.

The price tag is based on the availability of about $30 million net cash balance when the deal closes. With the deal, Agensys shareholders will retain the right to receive up to an additional $150 million based on milestones related to the company's development after the acquisition. The deal is expected to close by the end of December, provided it gets shareholder and regulatory approval.

The decision to enter the agreement with Astellas came out of partnership discussions with multiple companies, according to Alta Partners Managing Director and Agensys board member Farah Champsi. Agensys has already formed partnership agreements with Merck & Co. Inc., Genentech Inc., Sanofi-Aventis Group and Seattle Genetics Inc.

"Astellas really valued Agensys as a discovery engine for antibodies," Champsi said. "We thought that it was the kind of partner with the kind of money that we needed to maximize the platform that has been built to date."

To date, Agensys has raised about $119 million in venture funding, according to Agensys Senior Vice President and Chief Scientific Officer Aya Jakobovits. Agensys last raised a $41.3 million Series D round in July, adding new co-lead investors Duquesne Capital Management, most known for hedge fund investing, and Japanese private equity firm JAFCO Co Ltd.

Other investors involved in the round included Innovis Investments, Nextech Venture Ltd., Bear Stearns Health Innoventures, Alta Partners, HBM BioVentures, Lombard Odier Darier Hentsch & Cie, H&Q Life Sciences Investments and OrbiMed Advisors.

Champsi declined to comment on the return investors would see on the acquisition because the deal hadn't closed yet. Other investors did not return calls seeking comment.

In July, at the time of the Series D transaction, Champsi told VentureWire she was optimistic about the company's prospects, estimating the company could reach an exit in 12 to 24 months. That positive outlook for the company was bolstered by other transactions in the antibody space, according to Champsi, including the sale of Morphotek Inc. to Eisai Co. for $325 million and Abgenix Inc. to Amgen Inc. for $2.2 billion.

Agensys is the developer of antibody therapies for the treatment of solid tumor cancers. Its lead candidate, which is partnered with Merck & Co. Inc., targets prostate and other cancers. The company also has treatments in development for kidney, colon, lung and ovarian cancers.

With the transaction, Agensys will operate as a wholly owned subsidiary of Astellas US Holding Inc. Agensys, currently with about 100 employees, expects to retain its employees and management team, Jakobovits said.

Montgomery & Co. LLC served as financial advisor to Astellas for the deal, while J.P. Morgan Securities Inc. acted as financial advisor to Agensys. Morrison & Foerster LLP served as legal counsel to Astellas, and Latham & Watkins LLP served as legal counsel to Agensys.




True Single-Molecule Sequencing by Helicos - Sent Using Google Toolbar

True Single-Molecule Sequencing by Helicos

Theresa's Biotech / Biomedical Blog

From Theresa Phillips,
Your Guide to Biotech / Biomedical.
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True Single-Molecule Sequencing by Helicos

Data demonstrating a method for true single-molecule sequencing (tSMS)TM, developed by Helicos BioSciences Corporation, will be released today in the peer-reviewed journal Science Magazine. The 5-year-old company, Helicos (now publically traded under NASDAQ: HLCS), specializes in sequencing-by-synthesis genetic analysis platforms.

In a telephone interview with corresponding author Dr. Tim Harris, I learned that the HeliScopeTM Single Molecule Sequencer is the first commercial product to deliver a sequence on a strand of DNA without prior amplification. Before the introduction of this platform, DNA sequencing methods required multiple copies of the target sequence to be generated by PCR-based techniques.

As the recipient of "$1000 Genome" grant funding and a member of the Personalized Medicine Coalition, Helico aims to produce high throughput platforms that reduce costs and minimize laboratory bottlenecks while providing accurate personalized diagnostics for genetic diseases such as cancer. Company literature on the sequencer states that it can sequence an estimated billion bases per day but has the potential to do a billion per hour, lending to the projection that someday Helicos will provide the technology to sequence an entire human genome in one day.

Thursday April 3, 2008

"Barcoding" Project Applies Biotechnology for Species ID - Sent Using Google Toolbar

"Barcoding" Project Applies Biotechnology for Species ID

Theresa's Biotech / Biomedical Blog

From Theresa Phillips,
Your Guide to Biotech / Biomedical.
FREE Newsletter. Sign Up Now!

"Barcoding" Project Applies Biotechnology for Species ID

An international species barcoding project is underway in an effort to find ways to instantly identify different species based on short DNA sequences in specfic regions of the genetic code. In a press release by the University of Guelph, it was announced that the headquarters for this international project will be the Biodiversity Institute of Ontario (BIO), located at UG.

The International Barcode of Life (iBOL) project will involve over 100 researchers from at least 25 countries, once it is fully underway. Research being done as part of the project will also help generate new technologies for informatics and screening techniques, in addition to enhancing existing methods for cloning and studying genes. The Canadian Barcode of Life Network (BOLNET) is holding a symposium on April 28, 2008, in Toronto, Ontario, Canada.

Those interested in barcoding research for taxonomy in Europe should look to EDIT (European Distributed Institute of Taxonomy) for information. For more info on barcoding and links throughout North America, also check out the Barcode of Life Initiative (BOLi) website.

Wednesday April 2, 2008


The Case for Enterprise Business Model Management - Sent Using Google Toolbar

The Case for Enterprise Business Model Management

The Case for Enterprise Business Model Management

Editor's Note: This article is featured in the 2001 Resource Guide, a supplement to the December issue of DM Review.

Within the corporate organization, information technology (IT) is playing a key role in an economic expansion unprecedented in the modern age. IT systems have delivered major cost savings and have offered new insights into corporate operations. Yet, while corporations employ a wide array of technologies and business process techniques to control costs and increase the bottom line, very few companies formally capture, manage, leverage and communicate their business model – the very heart of their go-to-market strategy and performance analysis framework. This is due in large part to the fact that IT development has focused on data modeling and business process modeling. Companies quite simply lack sophisticated technology for business model management. Another reason companies don't engage in business model management is their failure to realize that they need to do it or a mistaken belief that they are already doing it. While it is true that in the past companies could adequately manage their business model using best-available practices, that day is passing. Faced with unrelenting competition from traditional competitors and new competitors leveraging technologies such as the Internet as well as the pressure from Wall Street, businesses must reinvent themselves or invent new business models. In this environment, the need for accurate, context-based and comprehensive decision making is paramount, and such decision making depends on effective management of the business model.

Figure 1: Interfunctional Relationships in a Business Model
Figure 1: Interfunctional Relationships in a Business Model

What is the Business Model?

The business model can be defined as the sum of how the organization does business (how it is organized, what it sells, how it delivers products and services, how it adds value) and the business management rules governing its strategy, plus how it wants to measure the performance of the business.

A company's business model consists of every business function and all the interfunctional relationships in that company.

The business model also includes the enterprise's sub-models, such as the financial model, organization model, sales model, customer model, product model, distribution model, logistics model, etc., and the many-fold relationships and interactions between each of these models or between components within each of these models. These relationships are the business management rules that capture how one or more models impact each other. An example of a relationship is the simple business management rule – "Our insurance products can only be sold in particular territories (due to licensing restrictions)."

The straightforward task of capturing the business model and providing business executives with a visual view would significantly enhance business understanding. The ability to communicate the business model efficiently and accurately to all corporate constituents puts everyone in the company on the same page. This improved company-wide understanding of the business model – the business itself – forms the foundation for sophisticated and relevant decision making – the tool for accomplishing corporate objectives. A comprehensive business model management initiative can enable opportunities that directly and positively impact the corporate bottom line.

Evolution of Enterprise Applications

The evolution of enterprise applications explains why business model management has been neglected and, at the same time, illustrates how businesses have been brought to awareness of the need for business model management.

Data Modeling

Enterprise applications as packaged solutions arose as a way to bring greater efficiencies than the customized applications first implemented to reduce business costs through the use of IT. The corporate goal was to streamline the processes across the traditional stovepipe custom applications. Separate groups of enterprise applications emerged, focused on either the cost side (e.g., enterprise resource planning application systems) or the revenue side (e.g., sales force automation application systems) of the business model. In both cases, the goal was to reduce costs through data integration, utilizing the underlying technology of data modeling. These systems have been constructed principally by coupling a data model and the business operations rules of the organization (as opposed to its business management rules). The business model is only implicitly injected into these applications when components of the business model are captured during the business requirements discovery phase of the project. The gathering of business requirements is dominated by the need to capture business processes with their own business rules. Moreover, whenever any business model component is captured, it is always limited to the current, or as-is, state of the business. During implementation, the business model as such is buried, generally within the application code or as a part of the data model. Examples of embedded business model components are: What products do we sell? and What are our distribution channels? In essence, enterprise models are not driven by the business model; they are data model-driven.

Furthermore, in enterprise applications the business model is fragmented across heterogeneous systems which utilize incompatible formats for representing business model information, resulting in little, if any, ability for those systems to communicate and interoperate from a perspective of shared business model. Thus, although they provide well-understood efficiencies and cost reductions, enterprise applications, in fact, limit the corporation's ability to understand and communicate its core value proposition: the business model.

Business Process Modeling

Vendors of enterprise resource planning (ERP), sales force automation (SFA) and similar applications and their corporate customers recognized that the integration of functionally different enterprise application components could bring significant reductions in cost. The solution was to translate the business model from the perspective of one corporate function to that of another corporate function (e.g., human resources to finance, finance to manufacturing). The hope was that business process integration across functions would allow for the ease of transition from one corporate function to another, thus streamlining operations. Organizations have invested large sums of money and resources to bring efficiencies to their operations through this kind of process integration. However, because most business process integration is undertaken within the confines of a single application, or a set of applications from a single vendor, it remains limited by that application or set and by the fact that the foundation of such integration remains data modeling. As a consequence, while these solutions succeed in integrating the data of two or more corporate functions, they achieve only a partial integration of the business processes of those functions.

Figure 2: Sales Model

Corporations have also had to accept a piecemeal approach to systemizing such initiatives as customer call centers, logistics management and marketing. The only choices open to them are multiple vendors and multiple solutions, each focused on a single initiative. The result has been a further proliferation of nonintegrated systems. Enterprise application integration (EAI) software solutions have been created in an effort to solve this lack of integration. Driven by the need to make supply chain processes more efficient and the opportunity to utilize the Internet as a communications vehicle, EAI has evolved into B2B application solutions. EAI focuses on data integration, while B2B solutions leverage the technology of business process modeling to effect business process integration across dissimilar applications and across enterprises.

Business Intelligence

While enterprise applications such as ERP and SFA were developed as part of an effort to reduce corporate costs, a parallel group of applications emerged to improve analysis and understanding of corporate performance. These applications also began as customized components and have evolved into the packaged business intelligence (BI) solutions we know today. BI applications help corporate executives to understand the historical performance of corporate operations (e.g., Who were my top ten customers last quarter?). A few attempt to predict the future by projecting historical performance.

The need to leverage historical performance to predict near-term performance or consumer behavior is leading vendors to deliver solutions where BI is closely integrated with specific customer-focused enterprise applications and processes. An example of an extended BI solution is customer relationship management (CRM). The CRM industry is currently segmenting and fragmenting to address different aspects of closed-loop relationship management such as channel partner relationship management and supplier relationship management. Driven by the Internet, CRM solutions focus on affecting the revenue side of the value equation through micro-management and micro-actions. But these solutions are inadequate because micro-management cannot deliver sustainable revenue opportunities.

What is the value of business performance analysis if it cannot be converted to future actions? How can initiatives such as CRM deliver sustainable growth? What is needed is the ability to analyze in the context of the business model and then make changes to the business model. These model-driven business changes or actions can deliver sustainable revenue growth.

Enterprise Business Model (EBM) Management

Today the increased size and complexity of corporations and the rapidity and radical nature of business change make effective business model management imperative.

Figure 3: Business Model-Driven Enterprise Model
Figure 3: Business Model-Driven Enterprise Model

Change is the order of the day. According to McKinsey and Company, to deliver on a sustainable growth strategy, established enterprises must constantly change along a continuum on which they first defend their core business, then generate a steady pipeline of new emerging businesses and, finally, develop new business and market ideas. The third phase gives rise to its own continuum, a reverse of the first, with new business ideas evolving to emerging businesses and finally to a core business.

Similarly, brand new enterprises, to be successful, must also evolve through the continuum from ideas to an emerging state and then to building a core defensible business. In the McKinsey model, the one constant is an ever-changing business model. A company that chooses to undertake business model management will enable its executive management to effectively make and track the changes required for sustainable growth.

Internet technologies are another source of rapid and disruptive changes in the business models of most organizations. It is imperative today that each organization have a clear, detailed and formal understanding of its business model in order to manage and control changes in its business.

Corporate complexity and rapid change increase the information gap between what a business actually is and what it is perceived to be by its constituents. Business model management closes this gap.

Business model management also comes into play when determining corporate profitability. An organization's performance can be measured applying a variety of methods and tools. Every method and tool approaches the measurement of performance using a single, simple, yet sophisticated premise: corporate profitability – the relationship of the organization's revenues to its costs.

Profitability is also the accepted point for valuation analysis of each component of the organization's revenue and cost items. The performance analysis must be in the context of the organization's business model to ensure that:

  • The analysis is fair in relationship to its stated objectives and strategy – i.e., its business model; and
  • The analysis will lead to actionable items which, to be meaningful, must be translatable into changes in the business model.

The story of many Internet dot-coms illustrates what happens when a company fails to keep its focus on profitability. It is very interesting that once highly regarded Internet commerce start-ups have failed or are now seen as failing or soon-to-fail businesses. Although it is recognized that they are struggling, very few people understand the reason for this struggle. Tom Davenport (CIO, June 1, 2000) states that the Internet business model of these start-ups is, "We can have our cake and eat it too." The Internet is viewed as such a powerful tool that basic business model principles – such as the rule that choices or strategies in the same business unit must not conflict – are viewed as unnecessary. When an Internet start-up fails, it may well be that its business model was incomplete or not fully expressed and captured, leading to inaccurate and incomplete understanding of the business.

The business model context is also essential when analyzing alternative business models or business model variations when changes in business objectives and strategies are contemplated as well as when benchmarking to peer organizations and industries.

The need to formally model the business has never been more essential. A complete, end-to-end perspective of an organization's value is more clearly understood if viewed from the context of a complete, end-to-end business model. By actively managing the business model over time, a true contextual perspective of the value equation (cost vs. revenue) can be analyzed and understood; and changes made to such a model will deliver sustainable profit opportunities.

Previous attempts to accomplish an end-to-end perspective, fell short due to the realities of the marketplace and the business environment. Multi-vendor solutions, a market reality, had no single end-to-end definition of the business model incorporated in each solution. Moreover, they did not account for the business environment reality of constant, rapid change in the business model over time.

The efficient way to gain an understanding of end-to-end valuation and profitability is to have an enterprise facility that can represent the company (a formal business model) from the perspective of all the unique sub-models stored within each of the enterprise applications.

For instance, the CRM applications maintain information related to customer model (demographics, order frequency, order history, products, promotion information, etc.). The supply chain applications maintain information related to logistics model (suppliers, raw materials transformation and cost of goods sold). A brokered/ translated combination of business model information from both the CRM (demand chain) and logistics (supply chain) applications when related to the financial model would establish a clear picture of end-to-end profitability.

The Need for EBM Management Applications

IT has now evolved to the point where it can provide what organizations so clearly need – a new class of enterprise application, an enterprise business model management (EBM) facility. EBM applications are self-contained business model management facilities that provide the following capabilities:

  • Business Model Capture: The ability to extract business model information from existing enterprise applications and formally capture and codify it. Alternatively, provide a vehicle for systematic manual capture of the business model.
  • Business Model Communication: The ability to communicate time variant versions of the business model, both in business and technical terms, to all stakeholders within and outside the organization.
  • Business Model Change Management: The ability for business users to alter and track the business model over time, either selectively or in toto, with additional capabilities such as version control and audit trail.
  • Business Model Brokering: The ability to communicate, exchange and synchronize the business model across multiple application domains in both intra- and extra-enterprise environments.

The benefits of an EBM management facility include:

  • A formal way to define and codify the company's full go- to-market and business performance analysis enterprise business model.
  • An audited way to document and communicate the company's core competencies and best practices as they evolve over time, enabling current and retrospective business analysis within an accurate business model context.
  • An ability to project the company's core competencies and best practices, accounting for business change, into the future with a perspective of being able to analyze multiple future alternatives.
  • Improving the rate at which enterprise applications can respond to the company's rapidly changing business environment.
  • Providing the business user with the capability to directly effect business changes by taking control of the business model's change management processes.
  • Improving the speed at which enterprise application can be developed while reducing the cost of business model discovery.
  • Enabling the transition from one vendor's enterprise application to another's by brokering (exchanging) business model information between two proprietary formats, greatly reducing the cost, time and complexity of such transitions.
  • Supporting rapid business performance analysis within the context of the business model, a process called action-ready analytics, thus creating a shorter feedback loop to change the business.

Harjinder S. Gill is the founder of Entreon Corporation. He has more than 29 years of broad business and industry experience. Gill developed the information industry's first data warehouse reference architecture and framework, and the business dimensional modeling technique named the StarWay methodology. He is the co-author of The Official Guide to Data Warehousing, published by Macmillan Computer Publishing.

For more information on related topics, visit the following channels:


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Branching factor - Wikipedia, the free encyclopedia

Branching factor

From Wikipedia, the free encyclopedia

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In computing, tree data structures, and game theory, the branching factor is the number of children of each node. If this value is not uniform, an average branching factor can be calculated.

For example, in chess, if a "node" is considered to be a legal position, the average branching factor has been said to be about 35.[1] This means that at each move, on average, a player has about 35 legal moves, and so, for each legal position (or "node") there are, on average, 35 positions that can follow (when a move is made).

An exhaustive brute-force search of the tree (i.e. by following every branch at every node) usually becomes computationally more expensive the higher the branching factor, due to the exponentially increasing number of nodes (combinatorial explosion). For example, if the branching factor is 10, then there will be 10 nodes one level from the current position, 102 = 100 nodes two levels down, 103 = 1000 three levels down, and so on. The higher the branching factor, the faster this "explosion" occurs. The branching factor can be cut down by a pruning algorithm.


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Time-based pricing - Wikipedia, the free encyclopedia

Time-based pricing

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This article may require cleanup to meet Wikipedia's quality standards.
Please improve this article if you can. (July 2007)

Time-based pricing refers to a type offer or contract by a provider of a service or supplier of a commodity, in which the price depends on the time when the service is provided or the commodity is delivered. The rational background of time-based pricing is expected or observed change of the supply and demand balance during time. Time-based pricing includes fixed time-of use rates for electricity and public transport, dynamic pricing reflecting current supply-demand situation or differentiated offers for delivery of a commodity depending on the date of delivery (futures contract). Most often time-based pricing refers to a specific practice of a supplier.

Time-based pricing is the standard method of pricing in the tourist industry. Higher prices are charged during the peak season, or during special-event periods. In the off-season, hotels may charge only the operating costs of the establishment, whereas investments and any profit are gained during the high season. (This is the basic principle of the long run marginal cost (LRMC) pricing, see also Long run). Time based pricing is occasionally used by transportation service providers, whereby higher prices are charged during rush-hours, or, alternatively, some type of reduced-rate tickets are invalid at that time.

Time-based pricing of services such as provision of electric power includes, but is not limited to:[1]

  • time-of-use pricing (TOU pricing), whereby electricity prices are set for a specific time period on an advance or forward basis, typically not changing more often than twice a year. Prices paid for energy consumed during these periods are preestablished and known to consumers in advance, allowing them to vary their usage in response to such prices and manage their energy costs by shifting usage to a lower cost period or reducing their consumption overall;
  • critical peak pricing whereby time-of-use prices are in effect except for certain peak days, when prices may reflect the costs of generating and/or purchasing electricity at the wholesale level
  • real-time pricing (also: dynamic pricing) whereby electricity prices may change as often as hourly (exceptionally more often). Price signal is provided to the user on an advanced or forward basis, reflecting the utility's cost of generating and/or purchasing electricity at the wholesale level; and
  • peak load reduction credits for consumers with large loads who enter into pre-established peak load reduction agreements that reduce a utility's planned capacity obligations.

Time-based pricing is recommendable for utilities both in regulated or market based environment. The use of time-based pricing is limited in case of low difference between peak- and off-peak demand, unavailability of adequate time-of-use metering. Also, customer response to time-based pricing should be considered (see: Demand response).

A regulated utility will develop a time-based pricing schedule on analysis of its cost on a long-run basis, including both operation and investment costs. A utility operating in a market environment, where electricity (or other service) is auctioned on a competitive market, time-based pricing will reflect the price variations on the market. Such variations include both regular oscillations due to the demand pattern of users, supply issues (such as availability of intermittent natural resources: water flow, wind), and occasional exceptional price peaks.

Price peaks reflect strained conditions on the market (possibly augmented by market manipulation, see: California electricity crisis) and convey possible lack of investment.

Why do retail stores need dynamic pricing? With respect to the key objectives of growth and profit for any retail entity, dynamic pricing should significantly improve sales margins and increase sales by enabling the vendor to price variably and hence suitably and to control its product range based on profit margins. The retail stores will be able to compete more effectively with rivals in the form of mixed multiples, mail order and online retailers, who are often able to undercut but who do not generally have the same understanding of the retail market. In particular dynamic pricing is recognised as encouraging impulse buys, cross-selling of products and repeat sales.

How will dynamic pricing address the key stakeholder issues? Key concern for a consumer would be the availability of desired products 'at the right place, at the right time and for the right price'. The new information flows established to implement dynamic pricing should allow retail stores to update consumers as to the current and future availability and price of products. Suppliers demand responsiveness, volume sales, and the availability of demand and forecasts. Dynamic pricing will improve responsiveness by prioritising the sale of new products while ensuring that pricing decisions enhance its ability to sell more products. Finally, the new information flows can be shared with suppliers and distributors.

What will the introduction of dynamic pricing involve? The key steps are the effective integration, analysis and understanding of EPOS, customer, competitor and supplier data to monitor existing and future product range.

Where lies the congruence with retail policies? Dynamic pricing relies on target retail objectives (i) enhanced customer relationships; (ii) supplier relationship management; and (iii) inventory management.

What are the key risks involved? The processes required to implement dynamic pricing build on existing processes and on the processes required for the recommendations needed to reform the key company objectives listed above. Critically, dynamic pricing requires minimal ongoing external input.

Benefits of dynamic pricing
This strategy helps retail outlets to increase repeat purchases as well as enhance the ability to cross-sell products, depending on the volumes data received from EPOS, dwindling value of products held back at the warehouse or in the backroom of the outlet could be a measure of the effectiveness of this benefit.

Brand awareness could be increased which would be measured by number of product recalls and returns compared to the estimate of expected repeat purchases for competitors.

Another benefit of dynamic pricing could be increasing the margin of sales, thus maximising profits which could be a measure of the total percentage of sales to the 25% margin from EPOS data. This also reduces the risk of obsolete inventory, by measuring improvement in sales against products already ordered but not purchased due to them going out of vogue.

Typically, the responsibility of this implementation would lie with the marketing or the merchandising departments, i.e. if responsibility for brand awareness lies with the marketing department then the responsibility for margins and sales would lie with the merchandising department to ensure tacit co-ordination between the two.

Dynamic pricing could also help increase the volume of repeat customers indicating strengthening and retaining of existing customers leading to reduced churn rate. This could be further fostered by use of loyalty card schemes under the supervision of the marketing department. Ordering inventory restricted to requirement saves holding additional and perhaps outdated stocks which results in reduced inventory levels. This effect could be measured by the declining value of products held in the warehouses.

Sales of discounted products taken from EPOS could be a measurement of the effect of higher discounts and increased promotions and marketing campaigns, under the direction of the marketing department, as a causal effect of dynamic pricing.

Process and Implementation
Dynamic pricing is facilitated through pricing range over the product lines by pricing and demand forecasts based on past trends identified from the data available. Weekly meetings to sign off new product ranges and change in prices while time reviewing existing products for promotion (for obsolescence).

EPOS needs to be integrated with electronic pricing in stores by installing electronic price displays on shelves and setting up interactive store links. This could help in monitoring and displaying direct co-related sales value and price variation responses with the suppliers through vendor managed inventory.

Monthly evaluation and comparison of competitor prices and self-analysis based on activity based costing (from supplier to sale) will be required for which EPOS serves as the source for collating information on demand while activity based costing serves as basis of prices. Business growth can be propagated by analysis of profitability and statistics of existing stores to identify trends, for which a formal business case may need to be prepared, needing the involvement of regional managers to assess demand.

Dynamic pricing could involve significant business redesign depending on the present infrastructure and the ability to deliver desired data. In order to record and monitor customer data, key activities such as loyalty card schemes, updating of EPOS to record sales and staff training for recording sales would required to be initiated. EPOS needs to be updated to record and monitor by product range as well as by stores which would facilitate price and product changes in response to changes in demand as well as developing future decision making process.

In benchmarking of competitor pricing and product range, key activities would involve setting up of an integrated data base at head office recording weekly price and product data fluctuations of competitors. New methodologies will be required to analyse total costs per product and its contribution to bottom line in proposing a full costing method for product lines.

Dynamic pricing could also help increase the volume of repeat customers indicating strengthening and retaining of existing customers leading to reduced churn rate. This could be further fostered by use of loyalty card schemes under the supervision of the marketing department. Ordering inventory restricted to requirement saves holding additional and perhaps outdated stocks which results in reduced inventory levels. This effect could be measured by the declining value of products held in the warehouses.

Sales of discounted products taken from EPOS could be a measurement of the effect of higher discounts and increased promotions and marketing campaigns, under the direction of the marketing department, as a causal effect of dynamic pricing.

Negative customer impact of dynamic pricing
Customers of Amazon.com were startled and quite upset when they learned that the online mega-store was charging different customers varying prices for the same DVD movies. Amazon, it appears, was engaging in a form of "dynamic pricing" – an innovative pricing mechanism made possible by recent advances in information technology. By using the plethora of information gathered from customers – ranging from where they live to what they buy to how much they have spent on past purchases – dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer's willingness to pay. This resulted in a hoard of negative publicity for Amazon and the company had to take some drastic measures including heavy discounts to stem the tide of complaints.

Why venture capitalists give more money to entrepreneurs who have failed - Sent Using Google Toolbar

Why venture capitalists give more money to entrepreneurs who have failed

Why venture capitalists give more money to entrepreneurs who have failed

Monday, April 07, 2008

The venture capital world lionizes successful entrepreneurs, but failure is not the kiss of death.

That was driven home recently with the $50 million investment raised by BSG Alliance Corp., the newest startup from Austin tech veteran Steve Papermaster.

BSG's venture investors, which include longtime California firm Hummer Winblad, have put $70 million into the software services company in less than a year.

After my story about BSG's most recent infusion ran last month, e-mails and calls began arriving: Why were venture capitalists again handing millions to Papermaster?

Papermaster founded Agillion Inc., a high-profile software upstart that raised $45 million in venture capital. Agillion had a good product but almost no revenue in its 2½ years. Meanwhile, it spent lavishly. When the money ran out, Agillion went bankrupt in 2001.

Last week, I asked Hummer Winblad managing director Mitchell Kertzman how venture capitalists determine whom to back. He said investors don't look at an entrepreneur's record in black-and-white terms.

"Silicon Valley has always had a reputation for tolerating failure. It's not a badge of shame," Kertzman said. "Because if everybody thought it was a good idea, and you executed as well as you could and the market wasn't there or the economy was bad or it just didn't work, that doesn't mean people won't invest again. That's one of the great things about the Valley — it respects the effort."

Mitchell and Papermaster go back to Papermaster's first startup, BSG Corp., a software services firm he founded in the late 1980s. Papermaster made millions in 1991 by selling a big piece of his BSG ownership to Novell Corp. founder Ray Noorda. Five years later he sold BSG to Atlanta-based Per-Se Technologies for $440 million.

"Steve is a proven, successful entrepreneur who knows how use technology to change the way companies operate," Kertzman says. "I saw him do it at BSG, and I was impressed."

Papermaster later co-founded tech consulting firm Perficient Inc. and Rome Corp., an enterprise software company. He also founded Powershift Ventures, which fosters early stage tech companies.

Papermaster couldn't be reached for this column. In the past, he's lamented Agillion's failure but said, "You can't hit a home run every time."

Hummer Winblad and BSG Alliance's other investors are betting that BSG Alliance will be Papermaster's next breakout.

Founded in 2007, BSG Alliance focuses on making corporations more efficient by helping them shift from traditional systems to easier-to-use Web systems.

Papermaster told me last month that the company is in expansion mode. With a marquee list of customers including FedEx Corp., Merck & Co., Walt Disney Co. and Johnson & Johnson, BSG Alliance expects to have more than $75 million in revenue this year and be profitable, he said.

Still, the odds are stacked against venture-backed startups. Of every 10 venture deals, investors typically hope for one or two home runs, says Kirk Walden of Walden Consulting. The rest usually fizzle, he says.

"The odds of winning are low, and VCs go into deals knowing that," Walden says.

That's why investors place so much emphasis on the entrepreneur and the team.

"To have a winner, you need much more than a good business plan," Kertzman says. "You need someone who has this vision, this belief, this drive that no one can stop," he says. "But when you're backing that kind of person, you've got to accept that they're going to make mistakes. The best batter gets on base only three or four of 10 times."

Staff writer Lori Hawkins covers venture capital and startups for the American-Statesman.

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Battered Stocks That Bounce Back

Battered Stocks That Bounce Back
by Ryan Barnes (Contact Author | Biography)
Whenever a broad industry goes into the doldrums - whether due to a decline in business prospects, economic shocks, or simply a business cycle, most investors will try to tiptoe their way around re-investing in the now toxic sector. It can be a very profitable venture for both speculators and value investors, but investing in beleaguered companies should come with an adjusted set of rules. This article will highlight how to successfully see your way back into a troubled sector with your stock investments.

Business Cycles Perfectly Natural
With all of the hundreds of industries operating in our modern economy, it stands to reason that from time to time some will suffer from static, or even falling, revenues. Recent examples include the telecom industry during 2000-2003, the airline industry shortly after the terrorist attacks on the World Trade Center in September of 2001, and in the housing and mortgage-related markets in 2007.

Business cycles have been spotted and defined in recent decades as the natural "boom and bust" cycles of business that occur every three to seven years, on average. Following this pattern, corporate earnings also follow broad trends, with steadily rising profits for some period of time, followed by plateaus or drop-offs. The drops can be very steep, causing many shareholders to lose substantial portions of their investments. (For more insight, see Understanding Cycles - The Key To Market Timing.)

Step 1: Expect the Bad News to Continue
Typically, when an industry turns negative it affects every player to some extent, and stock prices almost always drop in advance of actual earnings. Eventually, the earnings will hit a trough, after which share price performance will gradually improve along with business results.

In the beginning, it helps to assume that the bad news is not done arriving, and that more hits to the stock price may occur. This will work to keep the greed factor down ("I've got to get in now before everything takes off").

Rarely do stocks rebound from a pronounced downturn so quickly that there's not ample time to get reinvested, so don't worry about finding the perfect timing. Look for deep discounts in valuation, book value and other fundamental metrics. Just because a stock is down 25-30% from its high doesn't mean it's a screaming buy. It could still fall even more, so don't overextend yourself on a large initial position.

This investing approach is essentially a combination of value investing (based on valuation and other metrics) and aggressive investing. The aggressive part is in going after a falling knife that has currently negative sentiment and may not have a clear road to recovery. The value investing portion is in finding companies that may be trading at deep discounts to historical market norms for metrics like price/book, price/revenue and price/earnings. (To learn more about value investing, see Stock-Picking Strategies: Value Investing.) 

Step 2: Look Deep in the Statements
It's time to roll up your sleeves and dig into those dry Securities and Exchange Commission (SEC) filings - it's usually the most comprehensive source of information investors will get. (For more insight, see Introduction To Fundamental Analysis and Advanced Financial Statement Analysis.)

Find out exactly what is on the balance sheet. First of all, company debt should be vigorously examined. This means going as far as knowing the covenants - you'll want to know exactly what portion of the debt is due, and when. Compare this with the company's operating cash flow for a quick feasibility check on its ability to repay debts.

Next, consider the company's credit rating and access to the credit markets. Will it need a cash infusion during the next 12-18 months? If so, will the company find cheaper or more expensive debt than what it currently has? This can have a major effect on a company's capital allocation decisions. In addition, if a company accesses a source of capital that the market feels is too expensive, investors may respond by selling or reducing their stock positions.

Are litigation issues keeping the stock (or industry as a whole) down? Look for management's comments on the situation, along with any specific outstanding court cases, which companies must disclose in quarterly and annual reports (10-Qs and 10-Ks, respectively).

Step 3: Examine the Price Trends in Shares
Looking at stock price histories and charts over the period during which negative events have occurred can give you a better feel for how bad news has been affecting the stock price. 

Pay special attention to days when earnings warnings or other negative news were released to the public, looking for the magnitude of drops on those days as well as the analyst community's reaction; the latter can often be found in news wires, media releases and upgrade/downgrade reports issued within a few days of the negative event.

There is certainly no definitive chart or graph for determining exactly how much a stock will fall based on the onset of a specific negative event or trend, such as a broad-based drop in revenue across an industry. Look for positive trends such as less selling off after recent bad news as opposed to the earlier bad reports; this could be a sign that the markets have priced most of the bad news into the current stock price. 

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Step 4: Be Willing to Wait It Out
Investing in toxic industries often means holding a position well beyond the point at which the bad news stops. You will likely have to wait until good news starts to flow in again, and this could take a couple of years to occur. Many technology companies didn't see accelerating revenue and earnings growth until early 2004, or even later following the Nasdaq collapse of 2000-2002. However, many tech stocks had cumulative returns over the period between 2000 and 2005 that handily outpaced the broad market. The point here is that even if you miss the bottom by 10-20%, being willing to wait out the downturn could bring higher returns in the long run.

Be prepared for upside surprises to come slowly; it takes time for company management to get a feel for the business environment after an industry-wide disaster and it may not accurately predict future quarterly earnings based on emotional or other non-business factors. Channel checks and industry reports often don't return any solid information until long after the worst of it is over because the prevailing psychology ("business is bad") tends to linger for a while.

Step 5: Start with a Smaller Position
Ask anyone who has tried to do it a number of times and you'll quickly find out that it's very difficult to pick a bottom perfectly. A lot of very smart investors believed they had found the bottom in stocks like Kmart, Worldcom and Tyco long before those stock prices scraped the floor. Stocks can be very volatile to the downside when news is bad, even more so if the stock has a beta larger than the market-based average of 1. (For more on this measure, read Beta: Know The Risk.) 

Consider only buying a position (such as one-half or even one-third) of the amount you would normally invest with. Set up a schedule to fill out the position based on specific guideposts such as quarterly earnings reports, where the company meets predetermined guideposts for revenue growth, margins or cash flow growth. This will keep your attention focused on the current news feeds, and starting smaller will help prevent exposure to huge losses if it turns out you jumped the gun a little early. 

Every industry will go through hard times, but these downturns can create solid investment opportunities for those who can balance the patience and aggressiveness required. 

A stock that rebounds well may quickly become a favorite in your portfolio, but try not to be biased because of a short-term gain you've achieved. Having goals in place for total return and other company metrics like revenue, profits and margins will help to frame the investment and allow you to tune out short-term market noise.

by Ryan Barnes (Contact Author | Biography)

Ryan Barnes has more than 10 years of experience in portfolio management and investment research, covering equities, fixed income and derivative products. Barnes has spent the past five years working as an institutional trader and manager for high-net-worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley and many others. Ryan is working currently as a writer and financial modeling consultant on hedging and capital appreciation strategies.