Due Diligence Checklist: Small-Cap Biotech Turnaround with FDA Decision Pending

For: Advanced investor, 2% position size, 18-month liquidity event thesis
Investment Type: Turnaround/Event-Driven | Small-Cap (<$2B) | Biotech/Pharma
Estimated Time: 12-15 hours for deep research
Complexity: High (requires understanding of FDA process, clinical endpoints, patent landscape)

⚡ QUICK PRIORITY ITEMS (Do These First - 2 hours)

1. FDA Decision Catalyst Validation

• Confirm PDUFA date and FDA review type
  • Where: Company press releases, SEC 8-K filings, RTTNews FDA Calendar
  • What matters: Standard review (10 months) vs Priority review (6 months)
  • Green flag: Priority review = FDA sees unmet medical need
  • Red flag: Multiple Complete Response Letters (CRLs) or resubmissions
  • Your research: PDUFA date: _______, Review type: _______

2. Cash Runway Assessment

• Does company have cash to reach FDA decision date?
  • Where: Latest 10-Q → Balance Sheet + Cash Flow Statement
  • Calculate: Cash ÷ Quarterly Burn Rate = Quarters of runway
  • Critical threshold: Must have >2 quarters beyond PDUFA date
  • Green flag: Cash sufficient without dilution
  • Red flag: Dilutive financing needed before FDA decision

3. Clinical Data Quality Check

• Did pivotal trial(s) hit primary endpoints convincingly?
  • Where: Phase 3 topline results press release, 10-K
  • Critical: Statistical significance (p-value <0.05) AND clinical meaningfulness
  • Green flag: Clear efficacy, clean safety profile
  • Red flag: Borderline p-values, safety concerns

4. Insider Trading & Institutional Activity

• Are insiders buying ahead of catalyst?
  • Where: OpenInsider.com, Form 4 filings, 13F filings
  • Green flag: CEO, CMO buying in open market near catalyst
  • Red flag: Heavy insider selling, or zero insider ownership

5. Competitor Landscape & Commercial Viability

• Is there a clear market need?
  • Where: Analyst reports, competitor 10-Ks, ClinicalTrials.gov
  • Green flag: First-in-class, or significantly better vs existing drugs
  • Red flag: 5th drug in crowded market

DECISION POINT: If 2+ red flags above, turnaround thesis is weak.

1. BIOTECH-SPECIFIC DILIGENCE (20 items - 4 hours)

Drug Pipeline & FDA Regulatory Path

• What’s the indication and target patient population?

  • Where: Company website “Pipeline” page, 10-K Item 1
  • Calculate addressable market: Prevalence x incidence x % treatable
  • Green flag: Large unmet need (>100K patients)

• Regulatory history: any Complete Response Letters (CRLs)?

  • Where: Search SEC filings for “Complete Response Letter”
  • If yes: Has company addressed all issues?
  • Red flag: CRL for efficacy/safety concerns (harder to overcome)

• Advisory Committee (AdCom) scheduled or waived?

  • Where: FDA.gov AdCom calendar
  • Green flag: AdCom waived, or strong vote (8+ to 2+)
  • Red flag: Split or negative vote

Patent & Exclusivity Protection

• Patent expiration timeline

  • Where: 10-K “Intellectual Property”, FDA Orange Book
  • Green flag: >10 years of patent protection post-approval
  • Red flag: <5 years (generics coming soon)

• Orphan Drug or Fast Track designation benefits

  • Where: FDA.gov search company name + “designation”
  • Orphan Drug: 7 years market exclusivity
  • Green flag: Orphan + Breakthrough = strong regulatory support

2. FINANCIAL HEALTH FOR TURNAROUND (12 items)

Burn Rate & Financing Risk

• Quarterly cash burn rate trend

  • Where: Last 4 quarters 10-Q → Cash Flow Statement
  • Green flag: Burn rate stable or declining
  • Red flag: Burn accelerating

• Share count dilution history

  • Where: 10-K → Weighted avg shares outstanding (last 3 years)
  • Green flag: <25% dilution over 3 years
  • Red flag: >100% dilution (your ownership cut in half)

• Warrant overhang and potential dilution

  • Where: 10-K → Notes → “Warrants”
  • Calculate: (Warrants + Options) ÷ Current Shares
  • Green flag: <10% dilution from warrants
  • Red flag: >30% dilution if all warrants exercised

3. RISKS & RED FLAGS - TURNAROUND-SPECIFIC (10 items)

Binary Event Risk

• What happens if FDA says NO?

  • Estimate downside: Stock likely drops 70-90% on CRL
  • Check: Does company have cash for another trial? Or game over?
  • Red flag: CRL would be existential event

• Historical FDA approval rate for this indication/drug class

  • Where: FDA approval statistics, biotech databases
  • Context: Oncology ~35% Phase 3 success, rare disease ~60%+

• Probability of dilutive financing before FDA decision

  • Check recent 10-Q MD&A: Does company state “sufficient cash”?
  • Red flag: Vague language, or recent shelf registration filed

4. VALUATION & POSITION SIZING (8 items)

Probability-Weighted Scenarios

• FDA approval base case probability (your estimate)

  • Consider: Trial strength, CRL history, FDA track record
  • Your assessment: ___% approval probability

• Upside scenario: Approval + strong launch

  • Calculate: Year 3 peak sales × 5x revenue multiple ÷ shares
  • Upside: ___% gain from current price

• Downside scenario: CRL or rejection

  • Estimate: Cash per share (liquidation value)
  • Downside: ___% loss from current price

• Risk/reward ratio

  • Calculate: (Upside × Prob) ÷ (Downside × Prob)
  • Decision rule: Need >3:1 risk/reward for 2% position

DECISION FRAMEWORK

BUY (Full 2% Position) IF:

✅ FDA approval >60% likely based on data quality
✅ PDUFA within 6 months (fits 18-month thesis)
✅ Cash runway: No dilution needed before decision
✅ Risk/reward: >4:1 ratio
✅ Downside: Can withstand 70-90% loss (only 2% position)
✅ Data: Phase 3 hit primary + secondary endpoints convincingly
✅ Completed: Minimum 85% of checklist

REDUCE TO 1% IF:

⚠️ Approval probability 40-60% (higher uncertainty)
⚠️ Cash runway tight (possible dilution before PDUFA)
⚠️ Risk/reward 2:1 to 3:1 (acceptable but not great)

PASS IF:

❌ FDA approval probability <40%
❌ Cash insufficient (dilutive raise imminent)
❌ Clinical data weak (borderline endpoints, safety concerns)
❌ CRL history unresolved
❌ Can’t complete 70%+ of checklist (insufficient data = too risky)

CRITICAL REMINDERS FOR TURNAROUND THESIS

🔴 This is a binary bet: Small-cap biotech turnarounds live or die on single FDA decision. Position size (2%) appropriate for high-risk/high-reward.

🔴 Dilution kills: Even if approved, heavy dilution before decision can destroy returns. Cash runway is CRITICAL.

🔴 Data quality matters most: Beautiful story, great management, huge TAM—none matters if Phase 3 data is weak.

🔴 Know your downside: If FDA says no, what’s stock worth? Can you stomach 80% loss on 2% position?

RESOURCES

SEC Filings: sec.gov/edgar
FDA Calendar: RTTNews FDA Calendar
Clinical Trials: ClinicalTrials.gov
Insider Trading: OpenInsider.com
Patent Database: FDA Orange Book
Biotech News: FierceBiotech, BioPharma Dive