What do you think of when someone mentions investing in biotechnology? Young cash-burning pharmaceutical-wannabes on the cutting edge of drug discovery and development? That's the view of most of the participants on The Motley Fool's biotechnology discussion board. I, on the other hand, have always preferred to look to the technology side -- those companies that support and provide the tools that enable innovations in the drug discovery, development, and diagnostic segments of biotechnology.
There is an old saying in investing that the surest way to get rich in a gold rush is to sell picks and shovels to the miners, and a couple of current trends give me the feeling that biotechnology has the makings of a gold rush. First is the scramble by big pharmaceutical firms to merge or partner with biotechnology firms. A couple of examples from December include Income Investor selection GlaxoSmithKline (which offered up a potential $2.1 billion to codevelop and commercialize Genmab's leukemia treatment HuMax-CD20), and former selection Merck, which closed on its $1.1 billion offering for Sirna Therapeutics. The latter seemed a generous price for the pharmaceutically unproven technology of RNA interference. The second trend giving me that warm fuzzy feeling is detailed in the most recent MoneyTree Report from PriceWaterhouseCoopers. The report tracks venture capital funding in different industries; it noted that in Q3 of 2006, biotechnology supplanted software as the top venture money attractor. It looks like it's well past time to expand biotechnologies' hardware stores.
There are a number of firms that support the biotechnology, pharmaceutical, and clinical industries, primarily by providing instrumentation and consumables. I maintain a short diverse list of about 30 companies that qualify as pure plays in this niche. The list excludes companies that operate in this field but have substantial offerings in other industries as well, such as Agilent Technologies
First among these is five-star-rated Bio-Rad Laboratories
Next up is Waters Corp.
The final mention is another five-star CAPS-rated company, Sigma-Aldrich
Many of the companies involved in biotech support haven't yet garnered enough interest to generate a CAPS rating. This includes well-established and respected midcap companies such as Pall
Biotech investors will continue to venture into the dark and scary mines of burgeoning pharmaceutical firms. There is certainly gold to be found in some of them, just remember to invest in some of the hardware stores of biotechnology along the way.
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Fool contributor Ralph Casale actually puts on a lab coat and fires up his Waters HPLC system nearly every working day. He owns shares in GlaxoSmithKline and General Electric. The Motley Fool has a disclosure policy.