Does anyone have an opinion re Recombinant Capital's web site?
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05-Feb-03
Sector Review - Biotechs
[BRIEFING.COM - Robert Walberg] Not that long ago investors were clamoring to get into the biotech sector. The stocks were soaring and new issues were being introduced on a weekly basis. Then the momentum died, as it often dies in the boom and bust biotech sector, and the once red-hot industry began to badly underperform the overall market.
A less accommodating FDA, the blow-up of the Bristol Myers Squibb/ImClone deal, a handful of high-profile clinical setbacks, the drying up of new capital and the lack of earnings visibility in an increasingly conservative marketplace all contributed to the group's retreat. Sector also lacked the sex appeal that came with the mapping of the human genome. Some how the mapping of the human proteome, while potentially more significant than the mapping of the human genome, has failed to capture the imagination of the investing public.
Despite these short- to intermediate-term concerns, Briefing.com maintains that younger, aggressive growth oriented investors need to have at least some exposure to the promising biotech sector. Given recent advancements in technology, and fact that there are now more therapies/drugs in late stages of development than at nearly any time in history, the growth potential for biotech remains far too promising to avoid.
Unfortunately, few of us have degrees in molecular biology. Consequently, much of what is taking place in the industry is beyond the average investor. It's just too complicated for most of us to completely understand. That's why it's important to have a frame work for investing in the sector.
Briefing.com contends that before you invest in any biotech company it should meet at least three of the four tests listed below. Even then, many of you will probably feel more comfortable owning a well diversified biotech fund. But for the more adventurous, here's a list of some key biotech basics:
Cash, Cash, Cash
One of the first steps to take in analyzing a biotech company is to make sure that it has sufficient cash to cover its burn rate for at least 1 1/2 years, though 2+ would be better. The burn rate is the amount of money spent on R&D each year. We also look for companies with current ratios of more than 2:1 (current assets/current liabilities) and low levels of debt.
Drugs in Development
It is also important that a company have drugs/therapies in the latter stages of development. And that generally means Phase II trials or later. If a company only has one or two Phase I or pre-clinical drugs/therapies, profitability is simply too far off for anyone to make anything but a wild guess as to potential earnings. Investing in such companies is a big gamble. Not that there's anything wrong with placing a couple of longshot bets in this sector, just as long as you understand the high risks going in. Recombinant Capital's web site provides an easy way to check on the number of drugs/therapies a company has in the various stages of development. You can also get a list of collaborating companies, which brings us to qualifier number three.
Collaborative Agreements
One of the most significant changes in the biotech industry over the past decade was the shift in the business model toward collaboration. Instead of trying to become the next Merck (MRK) all on their own, smaller, cash-shy biotech companies now seek to form ties with the large, cash rich pharmaceutical companies. Such collaborations are usually structured so that the major drug companies provide R&D dollars (in the form of milestone payments) to the biotechs in exchange for exclusive marketing rights to any drugs that ultimately receive FDA approval. Revenues from any final drugs are typically shared as well. The drug companies benefit in that collaboration reduces discovery failures, lowers costs, increases productivity and improves innovation. Biotechs win out by tapping into a large and steady source of capital. This structure works well in that it allows each firm to do what it does best.
How do you use this understanding of collaborative agreements to select biotech stocks? Simple. The more collaborations the better, especially if a company has numerous deals with top name outfits such as Pfizer, Merck, Glaxo, etc. However, you also want to make sure that the large drug companies have experience in marketing the kind of drugs being researched by their biotech partners.
Management
As with any industry, management is key. In researching biotech companies, look for those with experienced management teams (often top researchers/managers from old-guard drug companies) that boast a track record of successfully meeting milestone/earnings goals. Experience and success in turning research into saleable product is also an underappreciated key. Guiding drugs/therapies through the cumbersome FDA review process to marketability is not easy. Those management teams that have accomplished that task (the more the better) deserve notice.
Conclusion
Though near-term influences might keep the biotech sector on the defensive over the next couple of months, Briefing.com contends that the sector's long-term upside is too great to ignore. So with the short-term risks balanced by the group's tremendous long-term potential, Briefing.com upping its rating one notch to Market Perform, or Neutral. Sector funds certainly one way to go about gaining exposure to the group, but for those investors that like to buy individual stocks we suggest making sure that the stocks you consider meet at least three of the above guidelines.
Robert Walberg, Briefing.com |
