In response to your questions:
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Why does Jim McCamant think that HGSI is overvalued? Is it because he thinks
that there is only so much profit to be made from licensing their database and that
the big money will be for companies that develop the actual drugs? If so, do you
agree? Do you think that HGSI will get into developing drugs as time goes on? Do
you think they will go into agreements with companies to develop more specific
drugs rather than just to use HGSI's database as they currently do? Is Jim
McCamant not anticipating this?
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I think HGSI like many genomics/biotech companies will spend more
money than it currently has on R&D and expansion. As the company
acquires more contracts, the operating costs will increase. For
this particular area of biotech, the equipment doesn't come cheap
and meeting safety regulations and laboratory safety also weigh
in at a substantial amount.
But for the near term of 7 years, according to March 1996's issue
of Sci. American, these types of databases are greatly in demand
and companies like JNJ, Hoechst, BASF, Schering AG, etc. must
subscribe (they will be forced to subscribe to more than one...i.e.
they will subscribe to HGSI's and Incyte's to insure that they have
all the info they need).
So during this period, HGSI (and companies like it) will make a
huge profit on subscription fees. These databases are really useful
(I've personally used them, but I can't talk about the specifics.
Subscriptions are 3-5 year contracts valued between $4-6 million.
At operating costs averaging $50 million/year (for 5 years), HGSI
will inevitably hit $100 million in profits. Any successful drug
that comes out of this will just be an added bonus.
As to the argument that these genomics companies' stocks are
"overvalued", I see it this way:
Many of these companies do not have PE's. HGSI just broke into
the positive side at 13 cents/share. We can only speculate that
they will make ALOT this quarter (who knows what they'll make or
report for 3rd quarter..since analysts missed the mark for 2nd
quarter by quite a bit).
The point is, these companies could be trading at 30 times next
year's earnings or even more.
example: INCY is trading at 40-60 times next year's estimated EPS
and 10-30 times 1998's estimated EPS.
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What do I think?
I think companies like HGSI and INCY are trading at very reasonable
levels right now with about 10%-20% more upward potential in the
stock price in the next 3 months (given better market conditions).
But none of these stocks will trade higher until they have proven
themselves in 3rd and 4th quarter. HGSI needs to show a tremendous
increase in profits and revenue in 3Q while Incyte must prove that
it can show a profit by 4th quarter and significant increase in
revenue and a levelling off in operating costs.
The technology is hot and big biotechs/pharmaceuticals really
need it. There is high demand for genetic informational databases
for next 7-10 years. There isn't going to be any threat of new
competition for at least the next 4 years because these companies
have the most advanced technology and have established a presence
in the industry and are well respected.
HGSI and INCY aren't really competitors because the Human Genome
contains 4 billion base pairs and even after all that stuff is
sequenced, we have to sort out the anomalies and sequence all
the mRNAs, tRNAs, and determine the regulatory pathways and
processes associated with gene expression (which is no simple task).
So I see HGSI and other companies as collaborators and not really
competitors.
bottomline: YES THERE IS ALOT OF MONEY TO BE MADE BY THE HANDFUL
OF COMPANIES THAT ARE INVOLVED IN THIS AREA OF BIOTECHNOLOGY. |
