Some words on biotech:
The uncertainties involved are an order of magnitude greater than in the standard technology sector. Here are some of the obvious arguments against putting money into biotech:
1) product cycle is measured in years, not months, and the obstacles that a given product must overcome are huge.
2) outstanding patent questions, esp. for genomics companies
3) very few products to date, despite hype, and NO products that I am aware of that are directly tied to human genome data.
4) no gorilla or kings have emerged, again pointing to infancy of industry
5) political risks- I find it puzzling that the public is mostly against genetic engineering in agriculture, but there have been little noise about human genetic engineering outside of fetal research. The industry has a potential dark cloud hanging over its head in this regard. For many years now I have been concerned that our ability to sequence the genome will allow us to target particular ethnic groups with biologic agents. One such attack could provoke a moratorium on this type of research/development and essentially neutralize an entire industry. It is not as far fetched as it sounds.
It is a very wrong to compare the revolution of the internet to the biologic revolution that is coming. There are differences in scale and speed that cannot be ignored. There is no correlate to Moore's law in the biologic world, and that is telling. To me, the runup in biotech was very mysterious, since I could not find a macro event to cause the runup. I wonder if the frenzy would have materialized if the Fool had not bought CRA in mid December in the setting of a monster bull...
I have a background in molecular biology, and am pretty well versed with the technology, but I think I have an easier time deciphering many standard tech companies. Why? Mainly because it is pretty much impossible to figure out which drugs will make it through clinical trials. Thus the desire to go with companies with a big pipeline of drugs, because in many ways it is a crapshoot.
OK, then, either you go with companies with big drug pipelines or the "picks and shovels" approach. You can also spread your mad money around on speculative technologies like Ribozyme, Maxygene, and Abgenix.
I am bullish on biotech, despite the above- there will be some major advances coming down the pike. It will be very interesting to see whether the concept of "tailored therapy" takes off. I see a SLOW adoption for many of these advances, though. Look at it this way- if there is ever an industry that can benefit from IT implementation, it is healthcare. Despite this obvious fact, there has been virtually no penetration of information systems into healthcare. What does that tell you about the speed of adoption of new technology???? Yes, there will be major advances, but the pace of advance will be glacial, when compared with the speed of change in other industries.
It would be reasonable to allocate 5% of your funds to the sector, at the present time. My views would certainly change if there was a macro event to catalyze investor enthusiasm. This is my approach, in essence- I believe that there is a reasonable chance that sector will outperform general market (Nazdaq) over the next 5 years. I am keeping my biotech funds in a biotech mutual fund, and will invest in individual stocks and raise my allocation in sector only when I see clear evidence of rekindled investor interest, driven by a macro event (more so than a company-specific event). I have NO idea whether market will decide to follow my guidelines <g>.
As an aside, do not forget the agricultural and industrial applications, which in the end may rival or surpass the human applications.... |
