Pharm Animal
MarketTalk Forum on Pharmaceuticals, Biotech
August 25, 1999
Following is the transcript of a live event held on AOL's MarketTalk, hosted by Sage, via keyword: AOL Live. MarketTalk welcomed Gruntal & Co.'s David Saks, pharmaceutical and biotechnology analyst, into a live forum for investors on August 19 at 12:30 PM.
Sage Online is proud to introduce our special guest, Mr. David Saks, managing director and pharmaceuticals analyst at Gruntal & Co. Mr. Saks will answer questions related to pharmaceutical and biotechnology companies.
If you'd like to read David Saks' research and register for a free 90-day trial of Gruntal & Co.'s investment research, click here.
Comment by DS: This is David Saks looking into the drug and biotech industry. The outlook is bright. The recent correction we've seen in drug groups presents a buying opportunity. The valuations of the large drug firms, biotechnology issues, specialty drugs, and generics are very attractive. The earnings and new product breakouts make the industry a great investment for the next millennia. I encourage long-term and near-term investment in this industry.
Q: How far are companies in mapping the human genome structure?
David Saks: We are only at the beginning. The human genome mapping project is far from extensive utilization. We're only at the tip of genome science and the use of its chemistry and high science as a means to screen and to create new molecules of medical and commercial importance. From an investment angle, the aggressive investor should look at those companies with high scientific background, including genomic capabilities.
Q: Can you comment a bit on Biogen and its current pipeline of products?
DS: I recently recommended Biogen Inc. (BGEN: research, earnings), because it has a combination of a proven revenue stream and now with new products that are growing at extremely high rates and producing profits of over 50% growth. In addition, the new product pipelines have products that may come to market with multibillion dollar potential and this is not fully reflected in Biogen's share valuation. Biogen Inc. is one of the most undervalued biotech companies. I see compelling low valuation relative to the high peak potential of its star drug on the market, Avanox, for treatment of multiple sclerosis and other potential drugs in its pipeline.
Q: How long does the typical biotech company take to ramp up to profitability from initial start up?
DS: The time line from start up to profitability is unpredictable, because the searching out of new drug discoveries and passing the FDA hurdles are unpredictable, high risk, and on average, may take 10 to 15 years from beginning to commercialization. For that reason, there are fewer than a dozen companies in biotechnology with products on the market of their own creation. Notably, Amgen (AMGN: research, earnings), Biogen, and Genentech Inc. (DNA: research, earnings) would be the top choice, and most recently, we've seen IDEC Pharmaceuticals Corp. (IDPH: research, earnings), Immunex Corp. (IMNX: research, earnings), and MedImmune Inc. (MEDI: research, earnings) sparkle in the market. Most of the others are still far from profitable after being public in the past 10 years.
Q: Isn't it true that when people compare the Internet frenzy to the biotechs in the 1980s that if you held on to companies like Biogen and Amgen, you would have made a lot of money?
DS: The past 10-year return on Amgen is 3,600% on the money you invested. That's phenomenal. Pfizer has nearly a 700% return on your money. That is many times better than the market. Staying invested in good companies not trading out is good strategy. Gambling is day trading, and it doesn't work in my judgment. The Internet is hot now, but where will it be in five years? A new Internet company can be created in one day. You can't create a new successful Amgen in one day. I prefer to differentiate the Internet companies from pharmaceuticals/biotech, because drugs created by companies such as Amgen and Biogen will have market profit for 10 to 30 years. We are not sure about Internet companies in that time frame.
Q: What do you think about Generon and the cloning of body organs?
DS: I don't know much about the topic itself, but if we're looking for investment in this area, I'd look at Biogen. Its new drug in early stage development that could revolutionize transplantation is Antova; this drug could allow transplantation without blood typing or tissue typing. It would be like going into an auto parts garage and picking out the parts you need. If that part proves successful, Biogen could have a blockbuster. For the transplantation of skin tissue, Lifecell, in our opinion, has the best tissue transplantation product, and we expect early earnings breakout next year.
Q: Is it an all or none reaction with biotechs with only one product? For example, if a product isn't approved, doesn't the company just go down the toilet?
DS: Yes. It high risk and high return. The promise of new drugs keeps funding alive, but it is high risk, and many failures abound.
Q: Can you tell us a little about Pharmacia & Upjohn Inc.'s turnaround?
DS: Pharmacia & Upjohn (PNU: research, earnings) has produced an impressive turnaround. The new president has had tremendous success downsizing expenses and centralizing the company with its headquarters in New Jersey. Pharmacia & Upjohn improved its focus of drugs on the market and stimulated major existing drugs, which produced an impressive turnaround, and more is yet to come.
Q: Do you follow any foreign stocks in the sectors that you cover?
DS: I follow a limited number of foreign stocks, chosen because they're user friendly to me in the U.S. This means a high flow of fundamental information. Most foreign companies do not do that and if they don't, I would avoid them. In our research universe, Teva Pharmceutical Indus LTD Ads's (TEVA: research, earnings) outlook is bright as a specialty generic firm. Glaxo Wellcome plc (GLX: research, earnings) and SmithKline Beecham plc (SBH: research, earnings), both U.K.-based drug firms, are both attractive long term, and their products have gigantic global presence and look to accelerate in the future. One caveat, foreign currencies tend to degrade and depress earnings visibility and confidence, a risk factor that doesn't exist with U.S. firms. I suggest investors prioritize their risk tolerance.
Comment by DS: The investment performance of stocks in the drug group since 1980 has done better than the market in 15 out of 18 years. This should help people feel comfortable despite drug stocks being down from peak in April because of fears of political talk of healthcare reform. You should keep in mind that healthcare reform has, since 1964 with Medicare, been a big boost to demand and has been only a positive for investors. I would use the healthcare reform issue to step up now to invest in the pharmaceutical/biotech sector as we enter 2000 because I'm convinced drug groups will be among the most successful investments. Thank you.
Companies mentioned in this transcript:
Biogen Inc. (BGEN: research, earnings)
Amgen (AMGN: research, earnings)
Genentech Inc. (DNA: research, earnings)
IDEC Pharmaceuticals Corp. (IDPH: research, earnings)
Immunex Corp. (IMNX: research, earnings)
MedImmune Inc. (MEDI: research, earnings)
Pharmacia & Upjohn (PNU: research, earnings)
Teva Pharmceutical Indus LTD Ads's (TEVA: research, earnings)
Glaxo Wellcome plc (GLX: research, earnings)
SmithKline Beecham plc (SBH: research, earnings)
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