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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Casaubon who wrote (69513)	2/18/2001 9:33:30 PM
From: Ibexx	Respond to of 99985

TA's reasoning was quite logical. Costs of drugs/pharmaceuticals have never been the main reasons for the rising costs of health care in the US. Ibexx

To: Casaubon who wrote (69513)	2/19/2001 12:07:40 AM
From: Tunica Albuginea	Read Replies (1) \| Respond to of 99985

Casaubon, most biotech don't have any drugs out now that indicate their purported benefits are worth the price; or that they are better than what we got; or that they increase survival; many are in development stages; success is iffy; also they are so expensive by the time they come out, they will be out of reach; most will fail; finding the one that succeeds is akin to gambling; eventually something like Erythropoietin/Epogen/Amgen or Neupogen may come out, but there's many better investments elsewhere; So far in my daily practice there is little biotech to brag about. Here is a considerate review by somebody who's been on both sides of the fence: Barron's MAY 22, 2000 What Ails Analysts? Doctor Asks He finds their diagnoses of stocks far wide of the mark By LLOYD M. KRIEGER, M.D. interactive.wsj.com Who provides the more useful investment advice: a faceless gossip spewing information in an Internet chat room, or a highly paid professional analyst at a top Wall Street brokerage firm? Based upon some research I recently did, I just might listen to the Internet chatter. I was interested in how good a job analysts do at evaluating companies producing new technology. As a plastic-surgery resident with some finance experience, I chose to look at companies whose products target me and my patients as customers. A new area of biotech focuses on artificial skin for use in treatment of chronic wounds and burns. I gathered as many analyst reports as I could find from the past few years and gave them a good read -- comparing their conclusions to what I know to be the clinical realities. Essentially, all the analysts got the story wrong. When I looked at these companies several months ago, five were producing artificial skin: Organogenesis, Advanced Tissue Sciences, LifeCell, Integra LifeSciences and Genzyme Tissue Repair. One analyst projected that Advanced Tissue Sciences would sell its product to 45% of the market for large full-thickness burns by the year 2001. Another predicted that Integra LifeSciences would sell to 23.4% of the same market. A third analyst predicted that Genzyme would sell to between 19% and 37% of the market, though I had to do some back-of-the-envelope calculations to quantify the projected market penetration. Since there are five companies producing these products, the sum of all these projected sales would exceed the total potential market. These inflated sales estimates led to equally over-optimistic purchasing advice. All of the reports I read had some gradation of "buy" or "strong buy" as their headline. No analyst recommended "sell" for any of the companies. The analysts even got the size of the potential market wrong. For diabetic ulcer patients requiring pharmacologic or synthetic skin treatments, estimates of market size ranged from 272,000 to 400,000. For patients suffering massive burns requiring skin coverage, estimates ranged from 1,500 to 3,750. Accurate numbers are easily available, and the large spread in the analysts' estimates indicates exaggeration or lack of due diligence or both. The value of companies such as these cannot be determined using traditional measures such as price/earnings ratios. Their value lies in their new technology. The analysts were overly impressed by the new technology when developing their estimates of future sales and, ultimately, earnings. From a clinical point of view, I have used some of these products and a few of the technologies add real value to the treatment of patients. But they are not useful to the degree and along the time frame estimated by analysts. A few will benefit patients right now. Others will benefit patients once they become easier to use and have longer-lasting results. That might take several more product-refinement cycles over perhaps three to five years. Some of the products provide mediocre results, are tremendously overpriced and may never be refined enough to earn wide acceptance by physicians and patients. And just because a new product treats a wound does not mean established methods will immediately fall by the wayside. To dominate the market, the new product must be better and, in today's health-care environment, cheaper than the established treatment methods in order to "dominate" the market. None of the products yet rises to that standard. What the analysts lacked was any nuance for when, where and for whom these products would be useful. They simply gathered some raw numbers on disease victims, said the products would be used for basically all of them and multiplied their way to huge profits. It's as if an aluminum-siding company developed a new material to apply to homes and then rested its forecast for success on the assumption that it would sell to basically all of the 80 million homeowners in America. Some of them would not want to buy it. Others could not afford it. And many of them already live in homes made of stucco and don't need aluminum siding, no matter how new and improved. Why did the analysts do such a poor job? Much has been made recently of the conflicts of interest surrounding their work. They're employed by the same investment banks and brokerage firms that have business relationships with the companies they rate. The concept of "Chinese Walls" between the banking and research sides has disappeared. Start giving too many "sell" recommendations and the investment bankers lose business. To a large extent, analysts are now salesmen for the companies they evaluate. In the case I studied, I think there is another reason for the analysts' poor job in rating companies. They clearly did not understand the industry. And they did not seek advice from those who do. A survey of the reports written on artificial-skin companies offers some insight into this failure. Most did have a physician involved in writing the report. But the physicians often were not actually practicing, and some had not even completed their training. Others were not in a clinically applicable specialty. The result is that the reports read like press releases from public-relations firms, so caught up were they in the "gee whiz" nature of the new products. Nobody seems to have asked the hard questions about the products -- either of the companies that produce them, or of the professionals who would use them. The message from all of this is clear. As an investor, I've learned that analysts' reports are overly optimistic and poorly informed. I won't trust them as a basis for investing my money. The investment banks and brokerage firms that sponsor these analysts can take several steps to improve the quality of their reports. If they want to produce useful research, they should put their analysts back to work doing research instead of promoting the companies with which their firms have or hope to have business relationships. And they should train their analysts to get input from the professionals who actually will be using the new technologies being described in their reports, instead of simply rehashing the moist-eyed excitement of the companies' marketing departments. The recent turbulence in the high-tech sector has been confusing and even daunting to the individual investor. But until investment banks and brokerage houses take steps to improve the output of their analysts, professional research probably will not add much enlightenment. LLOYD M. KRIEGER is a plastic-surgery resident in Los Angeles and holds an MBA from the University of Chicago.