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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: scaram(o)uche who wrote (2167)	11/30/2000 10:14:41 AM
From: Thomas M.	Read Replies (1) \| Respond to of 52153

To the Editor: Michael Shaoul's article comparing the biotechnology sector with the dot.coms ("Familiar Formula," November 13) misses its mark by eight years and 90 gross margin points. The most obvious fundamental difference between the two sectors is the existence of a rational business model in biotechnology. Biotech has gone through a 10-year period of rationalization since the early successes of Amgen and Genentech and is now driven by a clear business model, focused on revenues, profits and the value of intellectual property. Breakthrough pharmaceuticals and diagnostics commonly generate gross margins in excess of 90% and typically have more than 10 years of patent protection following commercial launch. The sector is now generating tens of billions in revenues and billions in operating profit. Today, the industry is showing a rapid acceleration in discovery, patent activity and new product introduction -- with 283 biotechnology-derived products in pivotal human clinical trials and the genomics revolution opening up the number of natural protein targets from 400 to nearly one million. Few of the dot.coms have been able to demonstrate a viable long-term business plan. Shaoul states that biotechs are fundamentally overvalued, yet doesn't attempt to quantify or qualify this naive assumption. He simply states that, like the dot.coms, the group will suffer from "investors' inability to place concrete value of the future returns of new and little-understood technologies." Our firm employs 12 investment professionals to closely analyze and calculate present values of "little-understood technologies" within the health-care sector. Our net present value calculations suggest that many biotechnology companies are undervalued by orders of magnitude. The technical picture of biotechnology tells a similar bullish story. After the initial surge in 1981-1991 related to the launch of the first wave of naturally-occurring proteins (comparable to dot.coms in 1998-2000) the industry suffered through an eight-year period of absolute and relative underperformance. The sector exploded out of this basing pattern in December 1999 as investors focused on surging industry profits and the potential impact of the sequencing of the human genome. Biotechnology stocks plunged back to the 200-day moving average in April, yet began another sharp climb in the May-September period as money flows began to shift out of the technology sector and the plunging Internet stocks. Considering that Cisco's market capitalization is still above that of all public biotech companies, additional capital reallocation from technology could provide sustained gains in biotechnology stocks. The sector has once again retrenched to its 200-day moving average support line. While our firm is short certain biotechs that are likely to fail or appear overvalued on our discounted cash-flow models, we find it difficult to paint a negative picture of biotechnology in the early days of "the genomics revolution." The changes of gene-based medicine, as well as the equally important and widely underappreciated revolution in gene-based manufacturing processes, are sending the world into a new era of biology. The gold rush has just begun in the biotechnology sector. LARRY N. FEINBERG DR. ROSEMARY MAZANET DR. DAVID R. BLAUSTEIN Oracle Partners Greenwich, Connecticut