Hi ed,
I've thought about 2003-biotechnology. quite a bit, and what I'm convinced of is that there's a minor bubble there right now, in view of the actual profitability of the sector. It is exactly the sort of "story of hope" that Mr. Market tends to gush about. But I see some constraints to the 2003 rosy scenario. First of all, the hoopla about the Human Genome Project really needs to be viewed in terms of the fact that it is perhaps the most exciting science since the development of nuclear power in the last century. It is truly groundbreaking work of the highest intellectual order. Yet, looked at in terms of the practical profitable applications of genomic science, it is still in the R&D phase, about where INTC might have been with the microprocessor in, say, 1975. The concepts are there, the ideas are valid, but there isn't anything equivalent to the 8088 in genomic applications today. It's coming, I have no doubt, but the infrastructure isn't in place for mass produced products that the general public needs and wants to be available by 2003.
Extending that line of reasoning, the real crux for biotechnology is going to be proteomics, in my view, and that of a lot of scientists who are much smarter than I'll ever be. For it is proteomics, and the proteins that are what we hope to manipulate, that hold the key to much future therapeutic discovery. But the industry is really just in its infancy. Not even to the R&D stage yet, except possibly at some of the most advanced labs in the world, such as Celera and some of the university research facilities. Other than that, I've spotted a few very small research boutiques that simply don't have a critical mass yet. And when these small entrepreneurial companies do have research success, they generally are bought in by big pharma, which has funded a majority of these start-ups, because its a way to keep overheads to a minimum.
Moving beyond proteomics, we look at the cellular level of biological understanding, and this is where the human mind is truly boggled. DNA is a relatively simple molecule, and unravelling its mysteries is trivial in comparison to examining and understanding the complex interactions of proteins, nutrients, immuno-active agents, disease process and general functioning of the cell. We're probably a decade away from useful research, leading to saleable discoveries based on a complete theoretical understanding of the cell. For now, as for a long time, big pharma will rely on a kind of process of line extension, serendipitous discovery and emphasis on products that are capable of generating good profits because of their chronic condition maintenance characteristics. Think of the chemical cocktails used to keep the AIDS-HIV complex in check. One thing the industry would be loathe to do is to actually devote a major amount of funding to create a vaccine. That would be killing the goose that lays the golden egg.
Anyway, that's sort of the how and why of the rational understanding that biotech won't blossom in 2003. Another aspect of it, is that we did have a biotech bubble from about 1989 until 1991. Anyone who bought a biotech sector fund at the high in 1991 found that they were back to even money in 1999. So, that bubble done come and gone. And the profitability of the industry today, to a value investors point of view, is simply not compelling. We are already in the bubble, judging by conventional Graham-Dodd type metrics.
Whew. All that from a two word tease? Oy vey!
Salaams, Ray |
