Motley Fool on drug discovery vs. tool makers, FWIW
fool.com
In Biotech, Drugs are King
Plus, our Amgen checklist
Investors have several choices when it comes to biotech
investing. They can buy drug makers, tool makers, data
providers, and others. We in the Breaker Port focus on the drug
makers because we believe they will continue to create the most
value. Also, we share Human Genome Sciences' beliefs, and an
Amgen checklist.
By Jeff Fischer (TMF Jeff)
February 16, 2001
The biotechnology world is as varied as
foliage in a rain forest. You have your choice
of investing in drug makers, data sellers,
diagnostics companies, tool and gene chip
producers, and even laboratory providers.
We're most interested in drug makers, as
evidenced by our investments in Amgen
(Nasdaq: AMGN) and Human Genome
Sciences (Nasdaq: HGSI).
Celera (NYSE: CRA), as top dog in
bioinformatics, looked like too much of a
Rule Breaker in 1999 for us to pass up, so
we bought it, too. Since the beginning,
though, we've hoped that Celera would
become involved in more than data.
Therefore, we applaud the recent
company-endorsed notion that Celera will
eventually profit from drug development in some form, too.
Drugs are king
We focus on drug makers because, despite the high costs and risk, we
believe drugs will continue to create the most value among all
biotechs, even in an age growing rich with biotech data and amazing
machines. Drugs have long created the most shareholder value in the
industry, and this trend continues today. The most promising biotech
drug companies -- even those without any drugs on the market yet!
-- command larger market values than any of the data providers.
We spoke with Dr. William Haseltine, Chairman, CEO, and founder of
Human Genome Sciences this winter. His company is involved in
databases, drug development, and diagnostics, so we asked him where
he believed the most value would be created in the biotech industry in
the next ten to twenty years.
Dr. Haseltine replied, "The most long-term value will be made from
products that can be sold to a broad consumer base: drugs, food
products, and probably individual health services. The greatest value
lies here. Investors should be more cautious of companies that only
have scientists or other scientific companies or institutions for a
customer base."
He continued, "The power of modern technology is to reach deeply
into the consumer base, reaching millions of individuals."
So, over the next few decades, "Drugs will most likely have the highest
profits," Dr. Haseltine concluded. "Diagnostic tests linked to new cures
will be lucrative, too. Then new [biotech-related] food and health
services that reach most consumers individually -- that reach deeply
into the consumer base."
HGS' 2000 results
Human Genome Sciences announced year-end results on Thursday and
Tom Jacobs covered the story in Fool News. The company struck the
iron while it was hot in 2000, raising so much money that it now has
$1.8 billion -- enough to last an estimated nine years. The company's
first drug, with continued good trials, should be on the market by
2005, and it could be a blockbuster seller. HGS is trying to develop
only blockbusters (meaning $1 billion sellers), unlike most
biotechs which also pursue moderate success possibilities.
Human Genome's 2000 revenue was $22 million compared to $24 million
in 1999. Data sales have been on hold while old contracts expire. This
year, HGS is reselling its database, ideally at higher prices. I have a
call placed to the company and will update you on the situation. Since
the beginning, HGS has been exceptional at selling data on a royalty
basis -- meaning, for drugs developed on its data (for which it is also
paid), it stands to receive an additional 7% to 10% in ongoing
royalties. That sort of arrangement sets HGS well apart from its peers.
HGS presents a very long-term investment scenario, and it isn't
surprising to see the stock bounce up and down in the meantime
("meantime" being several years). The company is still being afforded a
strong valuation. This year, we want to see its four drugs successfully
move ahead in trials, and more lucrative and smart sales and partner
contracts signed. HGS did a good job summarizing 2000's progress.
(more follows on biotech investing in general) |
