Rule Breaker Portfolio Is Amgen's First CEO Right?
George Rathmann predicts biotech's future

Amgen's first CEO, George Rathmann, appeared recently in The New York Times to discuss many ideas important to the Rule Breaker's biotech holdings. Rathmann believes that bioinformatics and drug discovery platform companies probably need drug development to make real money, that genomics (including pharmacogenomics) will not reduce drug development costs and raise drug profits significantly, and that there will be as many or more biotech companies in five years as now. Tom Jacobs agrees with Rathmann's first opinion, but sees more efficiencies and profits down the road, and fewer biotechs in five years.

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By Tom Jacobs (TMF Tom9)
December 26, 2000

Biotech investors treat George Rathmann with a reverence otherwise reserved for favorite teams and Mom, and with good reason. Rathmann was the first CEO of Rule Breaker port holding Amgen (Nasdaq: AMGN), later co-founded drug maker ICOS Corp. (Nasdaq: ICOS), and now is CEO of Hyseq, Inc. (Nasdaq: HYSQ). Quite a resume!

He spoke recently with The New York Times about what genomics really means for drug making, whether pharmacogenomics (individualized medicine) will really matter, and what the biotech scene will look like in five years. I respond.

Does genomics really mean cost savings for drug development?
Drug making in the U.S. usually means 10 years and $500 million before a company secures FDA approval to market a drug. Can genomics improve the costs-benefit equation for drug makers?

Rathmann says: "I think the payoff from genomics is going to be maybe lower-quality leads, but so many of them that the overall opportunity is far in excess of what it was." But, "It's still going to take the 10-year cycle to get a product out into treating patients." More leads, less profit per eventual drug, same expensive development cycle.

Tom9 says: Agreed, and it's happening. Jeff Fischer points out that Genentech (NYSE: DNA) projects 25% annual growth for five years, pursuing many profitable drugs rather than a few blockbusters. On the other hand, The Motley Fool's Guide to Biotech Investing cautions that there is a floor below which a drug's revenues don't recoup development costs, so not every one of Rathmann's lower-quality leads will be profitable enough to follow.

But, I'll guess that he's wrong on more-efficient drug development, and side with those who predict incremental (a few years) improvements, not astonishing ones (cutting the time 50% or more).

Will genomics companies -- such as Celera Genomics  -- have to make drugs to survive?
The Times quizzed Rathmann whether "technology for use by drug companies in testing genes or discovering lead compounds... [is] enough to sustain a business, or does a company have to develop drugs?" Questioned specifically about Celera, Rathmann said, "It doesn't look like it right now [that they'll develop drugs], I have to admit. But, I don't think there's any doubt. He [Celera CEO J. Craig Venter] is too smart not to take the next step."

Tom9: Rathmann thinks Venter must move towards drug making. But, if Celera (NYSE: CRA) starts now with alliances for drug development -- probably through royalties for discoveries from its databases -- will it lag competitor Incyte Genomics (Nasdaq: INCY) or Rule Breaker Human Genome Sciences (Nasdaq: HGSI), using its own protein data to make drugs? Or, will Celera have better bioinformation leading to better drugs?

The answer goes to the heart of Rule Breaker investing: Why did the Rule Breaker portfolio invest in Celera? We invested largely because of Venter's visionary leadership and Celera's speed. So, either it will be ahead and in the right place or it won't be. In the meantime, we'll watch our investment's business develop. I'm not going to sweat the answers to those questions, because we picked the top dog. Let him race.

Is pharmacogenomics here to stay?
The discussion turned to the future of individualized medicine -- knowing enough about an individual's genes and the effects of drugs on genes so that drug companies can create more accurate drugs and doctors can individualize drug treatment. We asked recently how high the revenue ceiling was for bioinformatics companies such as Celera. We used Gene Logic (Nasdaq: GLGC), as an example for pharmacogenomics, or gene expression (what genes are turned on or off in a given cell with a given condition -- giving new meaning to "what a turn off, man."), but other major players include Incyte and Rosetta Inpharmatics (Nasdaq: RSTA).

Rathmann doesn't think there's real money for the drug companies in finding out the genetic bases' individual response to medicines -- if it means making one version of a drug for you and another for me. He believes that it's more important in human trials on a drug to pinpoint the right patient samples for a drug that will affect a large enough market to make money.

Tom9: I think he misses something here. If you can target specific drugs to the right people, sure, you may find yourself with a lot of drugs for small, unprofitable markets. But, this is where the Orphan Drug Act steps in, providing 7-year market exclusivity to drugs for small markets. With no competition, it can be at least as profitable to be king of an island as to be just one prince in a large nation. Genzyme General (Nasdaq: GENZ) made its start just this way -- with a successful treatment for Gaucher disease, a rare genetic disorder.

What will the biotech industry look like in five or ten years?
Rathmann
: "Consolidations will continue, and I would imagine they'll accelerate. And yet... five years from now there are going to more biotech companies that there are today, because they are being spawned at a pretty good pace."

Tom9: Rathmann apparently does not believe that the torrid pace of biotech financing -- either venture capital or investors in IPOs -- will slow down or run out over the next five years. I disagree. As with the Internet business-to-commerce boom and shakeout, capitalism will sort the few biotech winners from the far more losers, and the plethora of losers will chasten the capital markets.

But, that's a darn good question. Will there be more or fewer biotechs in five years? Let us know in this poll:

A--Rathmann's right: More biotechs in five years.
B--The same number of biotechs as now.
C--Fewer biotechs in five years than now.
D--Choice C, but they'll be a few big drug makers and some others.
E--Choice C, but more bioinformatics companies than you think, Tom9!

Yours in Fooldom,
Tom Jacobs (CRA and HGSI shareholder) -- TMF Tom9 when overdoing it on the discussion boards.

Rule Breaker Portfolio


12/26/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
AMGNAMGEN INC1.001.50%67.75
AMZNAMAZON.COM1.388.84%16.94
AOLAMERICA ONLINE0.220.57%38.50
CRAAPPLERA CORP - CELERA GENOMICS0.060.18%34.44
EBAYEBAY INC(0.31)(0.89%)34.69
HGSIHUMAN GENOME SCIENCES(3.00)(4.20%)68.50
SBUXSTARBUCKS CORP(0.25)(0.55%)45.00

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(8/5/1994)
Annualized
Rule Breaker0.93%0.93%(6.86%)(49.88%)714.62%38.81%
S&P 5000.71%0.71%0.02%(10.49%)186.91%17.92%
S&P 500 (DA)0.67%0.67%0.02%(10.04%)201.17%18.81%
NASDAQ(0.93%)(0.93%)(4.02%)(38.72%)246.24%21.43%

Trade Date # Shares Ticker Cost/Share Price Total % Ret *
8/5/944020AOL0.4538.504587.88%
9/9/972640AMZN3.1816.94560.55%
12/16/981160AMGN21.4467.75215.93%
7/2/98470SBUX27.9545.0060.98%
12/17/991260CRA39.7634.44(13.38%)
9/22/00560HGSI80.0568.50(14.43%)
2/26/99600EBAY50.2634.69(30.99%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain *
8/5/944020AOL$1,816.44$154,770.00$225,546.00
9/9/972640AMZN$8,408.40$44,715.00$62,130.70
12/16/981160AMGN$24,875.50$78,590.00$53,714.50
7/2/98470SBUX$13,138.62$21,150.00$8,011.38
9/22/00560HGSI$44,830.50$38,360.00($6,470.50)
12/17/991260CRA$50,093.00$43,391.25($6,701.75)
2/26/99600EBAY$30,158.00$20,812.50($9,345.50)
 
Cash: 
Total: 
$5,375.09
$407,163.84
 

* Our long term totals include both our realized and unrealized gains. For instance, we have sold portions of AOL and Amazon in the past, and those realized gains are included in our total returns for these stocks.



Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.