Ray, your post on biotechnology is insightful, learned, and well written. I could not have written such an intelligent thumbnail sketch of the sector and the factors that are driving the ultimate understanding of animal and plant biology. Having said all those nice things (g.) I have an intuitive feeling that your conclusions are wrong and I have a few thoughts to support that feeling.
Many of the facts that you point out with respect to how far off we are from having the keys to the protein and the cellular puzzels are undoubtedly correct. It is also correct to state that we are far from being able to discover, secure approval for and mass produce "products that the general public needs and wants" by 2003. Finally, it is undoubtedly true, as you say that "the profitability of the industry today, to a value investors point of view, is simply not compelling." In my opinion, as uneducated as it is, NONE of these facts will drive the market in biotechnology over the next few years. In order to understand my point of view several additional considerations are crucial.
Among these considerations are:
First, there is a huge CURRENTLY UNSATISFIED market for effective health care products that cure diseases, that relieve pain without harmful physical or psychological side effects, that prolong the term of life and even the term of life that is physically active, that enhance mental skills and physical appearance, and on and on (although I can't think of any now. g.) If we look just at the market for drug therapies that can extend life for cancer victims world wide or just enhance the quality of life for such victims, the market is huge. When you add in other serious illnesses or even such mundane illnesses as the flu, the size of the market is mind numbing. Many of the people who have the most need for such therapies are those with the most ability to pay for them or to pay for insurance to pay for them.
Second, the patent laws are working well enough that those who discover novel ways to find the keys to such discoveries, or who make such discoveries themselves, are well rewarded.
Third, the marriage of biology and technology is just beginning and the tech side of that marriage is just starting to spread with some JV's devoted specifically to bio. The learning curve should be geometric.
Fourth, it is not necessary to unlock proteins and cells on a grand scale in order to have significant breakthroughs that lead to amazing new medicines. Many of the current crop of drugs in phase 1, 2, and 3, studies are the result of serendipidous discoveries derived from the edge of the big cahuna. Others are evolved from our ability to alter diseased cells in ways that render them harmless so that we can use them for vaccines against diseases the individual has not yet contracted OR against those the individual has, by using the rendered harmless bad cells to alert the immune system to it's need to fight diseased cells the body had not previously recognized. Other companies simply stumble into things but are now able to isolate and replicate the beneficial qualities of the compounds they found.
Fifth, epidemiology standards and practices are accepted that allow scientists and approval agencies to isolate cost/benefit factors across wide geographical areas. The result is probably better efficiency in company wide decisions to pursue or drop certain drugs at earlier stages. We may be too conservative at times but at least the rules of the game are better known than in the past.
Sixth, there is still tremendous public sector financing support, along with private financing support in this field. The end result of successful discoveries will benefit all, including those who run government and have money. No one is immune to sickness, disease and aging, not even the rich and powerful and their families.
Seventh, can you imagine how much is spent yearly on the treatment of illness and disease, much of it ineffectively spent. The market is staggering.
Eigth, ninth, tenth, etc. the market is staggeringly huge.
I'm sure there are more but, hey, a guy can only type so much and I'm a little tired after defending myself from Gottfried and his henchman on the great "girley car" debate. (Thanks JHR, but after all those posts to me I question your judgement in coming out and admitting ownership. g.)
I think the bottom line is that this is a tremendous sector where the risk is high and the reward is higher still. All it has taken in the past to ignite this sector is for one of the story stocks to appear to be approaching a breakthrough. I think it is nearing critical mass where things start to come together in terms of what we know and how fast we are learning it. I don't see it as a bubble because the rewards are there from a fundamental point of view, it's just that the uncertainties and the time line are not in focus yet. As the tech sector struggled and discretionary money dried up, the biotech sector dropped. That's natural, it's also natural that when the market improves and venture capital is repaid, the biotech sector will get it's share. The knowledge base is building and with the tech side of the partnership becoming more involved, the future looks very promising for lots of new therapies. We may be a long way from the miracle therapies to reverse aging or cure all disease, I believe we are not so far from some significant breakthroughs on curing some diseases.
The problem, of course, is knowing which ones will be the ONES and which will fall by the wayside. One thing is sure, there are companies out there now that we will look at in 10 or 20 years and tell our grandkids "I could have bought stock in that company for under $3. This truly is the ground floor for a sector that will likely be one of the largest sectors of the economy in the future.
I, on the other hand, will be able to tell my grandkids that "I bought several companies for under $10 but not the ONE." I think you will agree that my story will be much more tragic. On that note, don't ever mention fundamental and biotech in the same breath again or I will really write a long post, tired fingers from "girley car" posts or not.
Warning, I don't know a damn thing about biology; I don't even remember if I took it in high school. I don't know much about tech either. I suspect that both of these are drawbacks in botech investing but I do believe in luck and base most of my investing decisions on the uncomfirmed belief that I am lucky. I might have even drawn on Clint Eastwood in his earlier movies. I wouldn't chance him in that last one where he was a worn out killer for hire though. I think it was "unforgiven." Ed |
