here's the section from the money article that referencies LGND
"...Big pharma needs biotech because conventional R&D won't produce enough blockbuster drugs.
Genomics | Drug biotech | Big pharma | Ag-bio
The average drug company's stock has quadrupled in the past five years, but big pharma, as it's known, is in danger of becoming a victim of its own success. Many of its best-selling drugs, including Zoloft and Prozac, will lose patent protection over the next five years, meaning profit margins on those drugs will all but evaporate. Moreover, because drug companies have grown so big, a new drug must have near-
Viagra sales to jazz earnings. And conventional methods aren't likely to produce the stream of blockbuster drugs the industry needs. Andersen Consulting estimates that a top-tier drug company would have to put out five new drugs a year with sales of $350 million each to maintain the 13% annual growth rate the industry has racked up in the '90s. Yet from 1990 to 1994, the top makers launched an average of one new drug every two years.
Big drug companies are hoping biotech can pump up their pipelines quickly and help them find the magic pills that have eluded them. "Pharmaceutical companies have one thing on their side -- an abundance of cash -- and one thing that's working against them, time," says Jeffrey Kraws, an Everen Securities analyst.
So big pharma is looking to make friends in a hurry. In the past 18 months, drug and biotech companies have struck 330 alliances. Drug companies have committed up to $6 billion in exchange for future royalties. One of the biggest collaborations, says Mark Edwards, managing director of biotech industry consultant Recombinant Capital, was last year's $200 million deal between Eli Lilly and Ligand Pharmaceuticals to develop retinoids (now used to fight acne and wrinkles) for treating diabetes.
In a typical deal, the pharmaceutical company makes a small, up-front investment for a biotech company to pursue promising research. It makes additional payments as a drug reaches various stages of development. If a drug makes it to market, the bigger partner handles marketing and/or distribution.
Eli Lilly got one of its best-selling drugs, ReoPro, through such an arrangement. In 1992, when the anticlotting agent used in angioplasty was nearing approval, Lilly paid $100 million to Centocor for the rights to ReoPro and another drug that ultimately failed. ReoPro now has annual sales of more than $250 million. Lilly's margins, after it pays royalties to Centocor, are an estimated 35% to 45%. So far, about 40 biotech drugs have come to market as a result of pharmaceutical/biotech firm collaborations. That number is expected to increase fivefold within five years.
Drug companies are also beefing up their own biotech research. They buy access to the databases owned by genomics companies and use that information to develop drugs. Pharmacuetical companies are famously tight-lipped about their internal R&D, but the U.K.'s SmithKline Beecham is known as an aggressive genomics player owing to its long-running alliance with Human Genome Sciences.
Though no drug has come from that partnership, SmithKline says genomics research allowed its scientists to work on 200 new targets last year. "SmithKline will be a leader in the next decade as products go into the clinic through genomics," contends Linda Miller, manager of the John Hancock Global Rx fund. She has 2.5% of her fund's assets invested in SmithKline.
Should you buy a drug company solely, or even partly, because of its biotech investing? Not yet. Biotech will play an increasingly important role in the fortunes of nearly all big drug companies. But with the possible exception of Lilly, big pharma won't see significant profits from biotech for several years. And it's impossible today to tell which companies will end up as the biggest biotech winners.
What we can tell you is that biotech is a reason to be bullish on drug stocks for the long term, and that drug stocks are a relatively safe way to play the coming biotech boom. (The failure of one drug won't sink Pfizer; it might doom its biotech partner.) Right now, pharmaceuticals are among the more expensive stocks in a frothy market. Two good companies have been roughed up of late, however, so they're cheaper than their peers.
Though no other drugmaker comes close to Merck's 18% annual growth rate since 1993, these days "St. Merck" carries a PEG of 1.7 -- which is 20% below the group's average. The company forecasts a tough second half this year, and investors are worried that its pipeline is drying up. But John Schroer, manager of the Invesco Strategic Health Sciences fund, thinks any problems are temporary. "The same people selling at $125," he predicts, "will be the same ones buying at $150 a few months from now." CIBC Oppenheimer analyst Steven Gerber adds that concerns over Merck's pipeline are unfounded. "We think Merck is extremely undervalued."
Our second pick is Eli Lilly. It's already had biotech success, and over the next five years, analysts expect the company to increase earnings by 17% a year. But Lilly's stock has been stuck in a narrow trading range since the end of 1997 after a one-time write-down of its PCS Health management business. Lilly has a PEG ratio of 1.8, a 16% discount to its peers. (And should a stock market crash depress millions of investors, at least Lilly sells Prozac.)..."
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