Drugmaker Growth Without the FDA

Do you have one of those stomachs that just can't take the ups and downs of clinical trial data and FDA approval decisions? You know that the health-care field will be growing as the population ages and that pharmaceutical and drug stocks are fairly recession-proof, but does the thought of a stock's value dropping because of poor clinical trial results keep you far away from companies like Gilead Sciences (Nasdaq: GILD  ) , or even a large-cap pharma like Pfizer (NYSE: PFE  ) ? Here's an idea for you: Find growth without ever having to worry about the FDA.

Biotech and pharmaceutical companies buy lots of chemicals, reagents, and equipment to help advance their research. By investing in the companies that sell the supplies necessary to do experiments, you can take advantage of the industry's growth without taking on the clinical trial risks.

Having just finished a 10-year stint chained to a lab bench, I can tell you some of the companies we bought our reagents from. These aren't recommendations to buy the companies -- I'll leave the due diligence up to you -- but rather exciting companies providing innovative, top-quality research tools for scientists.

One word of caution before we get into the companies: The growth of this industry is also driven by academic research, much of which is funded by the National Institute of Health (NIH). Over the last few years, the national government has failed to keep funding for the NIH at pace with inflation. If the government continues to underfund the NIH, we'll likely see a decrease in spending from academic intuitions. Also, all of these companies have worldwide sales, so spending by other governments will affect sales as well, although their budgets tend to pale in comparison.

Sigma-Aldrich
If a scientist needs a chemical, the first place to turn is the Sigma-Aldrich (Nasdaq: SIAL  ) catalog. If it's not in there, there's a pretty good chance that it's not sold commercially; the book is about 3 inches thick, after all. It's often not the cheapest place to find chemicals, but scientists often default here because they know that the compound will more than likely be available.

QIAGEN
Before QIAGEN (Nasdaq: QGEN  ) came along in the '90s, one aspect of molecular biology that most researchers hated was the isolation of pure DNA. The procedure to extract it was a laborious process taking more than a day to complete, and it required working with a pretty toxic chemical. QIAGEN has simplified that procedure down to a few hours and eliminated the nasty chemical. Its kit certainly costs more than the previous isolation method, but in the lab, time is money, and almost all labs have switched over to the new system. It has run into competition from many other companies, such as Millipore (NYSE: MIL  ) and Bio-Rad Laboratories (AMEX: BIO  ) , which have similar kits to isolate DNA, but QIAGEN has held its ground, and the legendary blue boxes can be seen on the shelves of most labs.

Since its first kit was developed, the company has expanded into other aspects of molecular biology, including the isolation of proteins and polymerase chain reaction (PCR) reagents and now has more than 500 consumable products and automated systems. In the labs I've worked in, we've chosen not to expand our purchases from QIAGEN to those areas of molecular biology, but they have certainly kept our nucleic acid isolation business.

Invitrogen
Invitrogen (Nasdaq: IVGN  ) sells a wide variety of products for scientists, much of which it acquired through purchasing other companies. The companies it chose to purchase were certainly leaders in their fields. I used Gibco, Molecular Probes, and Dynal products before they became part of Invitrogen, and continued to use them after they were purchased.

One thing that I think Invitrogen did right was to leave the brand names alone after the purchase and just tack on the Invitrogen logo to the package. Most of the companies had strong brand names, and it has taken advantage of that. Some scientists are price-conscious, but all scientists want experiments to work every time. They'll often stick with the same brand for their entire careers because changing vendors might cause the experiment to stop working.

In addition to the reagents it sells, Invitrogen also has a growing list of custom services that it provides for customers. This is a growing trend I've seen in many well-funded labs (that would be all biotech and pharmaceutical companies and some of the larger academic labs, as well). Instead of becoming experts in a certain aspect of biology, the laboratory outsources an experiment or the preparation of a custom reagent to another company. Assuming the experiment doesn't need to be performed regularly, it's cheaper and faster for the lab to pay someone else to do the work than to do it themselves.

I hope this list gives you a good set of companies to look further into. I've left out companies that primarily design and supply equipment to laboratories, but I hope to get to them in a future article. If you'd like to discuss the financial aspects of any of these companies, jump on our discussion boards -- they're free, you know.

We have one lab-supply company picked in the Fool's market-beatingRule Breakers newsletter. Click here to sign up for a free 30-day trial and check the past issues to find out which company we've recommended.

Fool contributor Brian Orelli, Ph.D., is thankful that the Fool unleashed him from his lab bench and offered him a full-time writing contract. He believes in buying what you know, but he doesn't own shares of any company mentioned in this article. Pfizer is an Inside Value recommendation. The Fool's disclosure policy knows all.


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