TMF Jeff: Greetings! In this discussion we hope to help you learn how to THINK about biotech investing and companies, and we want to provide some biotech investing guidelines. Also, we've asked Fools who know the biotech industry very well what is the one thing that most investors don't know about biotech, but should know, and we'll share their thoughts about that tonight.
First, for those who don't know Rule Breaker investing, let us give an explanation to get us started on the right foot. We believe that Rule Breaker investing principles will help us spot many of the best biotech and related companies for possible investment. The principles behind Rule Breaker investing were created by David Gardner. In a nutshell, the Rule Breaker strategy looks for this:
Those are the criteria that we seek in any Rule Breaker investment. In the past, Rule Breakers have been or are: America Online (NYSE: AOL), Amazon.com (Nasdaq: AMZN), eBay (Nasdaq: EBAY), and Starbucks (Nasdaq: SBUX). We also hold up Amgen (Nasdaq: AMGN) and Excite@Home (Nasdaq: ATHM) as Rule Breakers, and, of course, Celera Genomics (NYSE: CRA). One Fool in the audience has asked if Human Genome Sciences (Nasdaq: HGSI) is a Rule Breaker.
I follow this company and believe that it very likely could be a Rule Breaker. Human Genome Sciences is an operation based in Rockville, Maryland, mere blocks from Celera. Since about 1992, it has been involved in harvesting genomic data in hope of discovering drugs. Human Genome Sciences now has several proteins in trials as potential drugs. It is a top dog and first-mover in what it does: harvest genomic-based data for drug development. It does have many patents, and it matches the Rule Breaker criteria (other than "brand name").
Another company that is really leading in "new age" drug development is Millennium Pharmaceuticals (Nasdaq: MLNM). It may be a Rule Breaker as well.
So those, along with Celera, hopefully provide some context for the types of leaders we're interested in and looking at in biotech and bioinformatics.
just_looking_90296 asks: Why did the CEO of HGSI trivialize Celera's annotating the Human genome?
TMF Jeff: There is a hearty competitive rivalry between those two companies, and there have been jabs back and forth. Human Genome Sciences claimed that Celera's data will not create much value, but I see this statement as basically an extreme and biased treatment of a competitor's work.
TMF Edible: Peer jealousy perhaps, Jeff?
TMF Jeff: Perhaps, Rick! Human Genome Sciences is proud of its patents and its database, and it fires shots at Celera partly in defense of its own discoveries. However, don't focus on the bickering. Focus on the businesses of each company to see how they will create value on their own.
bobbianchi asks: What did you think of the publicity surrounding the Celera/Human Genome Project announcement today? Did you think Celera handled the situation well?
TMF DavidG: I think Celera handled the event just fine. My thoughts on today's news are: everyone knew it already... thus, it wasn't "news" in the strict sense of the word. The market anticipated this event a long time ago and Celera, with its multibillion-dollar market cap despite having a fraction of that in current sales, had been accorded a generous multiple based on the expectation of today's event. The market then sold the stock off in what I consider a standard "buy on the rumor" (which many had been doing for months), "sell on the news" approach.
jazzman263 asks: Do you see the rough draft of the human genome benefiting Amgen and other biotech drug companies?
TMF Jeff: Amgen does subscribe to Celera's database and it paid about $25 million to subscribe for three years. So, I do believe it stands to gain ground (or at least to have more useful information) whenever Celera succeeds. The more data at Celera's fingertips, the more at Amgen's.
TMF Edible: If only we could only charge that much for premium research!
TMF Jeff: Eventually, this reality should make competing biotechs and pharmaceuticals sign up for the data, too, I believe. Long term, it's difficult to compete if your competitors have access to detailed information that you don't.
dcmalloy asks: Who are the leaders that will take the genome map to the next level (i.e., generate info others will want to pay for)?
TMF DavidG: Well, I would first look not at people, but at companies. And the ones to concentrate on are those with the highest amount of resources -- i.e., MONEY -- to make profits from the research enabled by the genome map. That's why I own Amgen in my portfolio, the Rule Breaker Port, and why you, dcmalloy, may own other similar companies. I believe the genome mapping has opened up an incredible age of research. Once you have the map, you then must organize your expeditions, and explore and reap, etc. The companies that have resources to bear will own the next 25 years.
amagruder_30909 asks: Why do companies pay for Celera's data when the government puts it on the Internet for free?
TMF Jeff: Thank you, amagruder_30909. This is a great question. I'll give it a shot. I think some companies, indeed, won't buy from Celera because, at least initially and maybe forever, they'll feel that they get enough value from the public database. But, many companies will want the edge (before long, it should be a substantial edge) that Celera is working to provide. Celera, for instance, has already mapped five human genomes. They use "redundant" mapping, in a sense, and have mapped 35.6 times. Therefore, the detail of the information they can provide surpasses what is available from the public database.
Going forward, that lead should compound as Celera maps mice, crops, chimps, whales (why not!), and so forth. Also, Celera aims to have the deepest, widest protein database in the world. I'm not sure the Human Genome Project will have much of a focus on proteins at all. I haven't read that it will. So, Celera aims to provide the most in-depth and detailed research/data on many, many living species. And, with its speed, it stands to do so long before others can.
TMF DavidG: View the Human Genome Project (HGP) as over, because it basically is. Now what begins is all the creation of solutions. Celera has the most powerful computers, a crack staff, and the legitimacy that comes from having achieved what it did alongside (cough, cough) the Human Genome Project. The critical thing is now "proteomics" not genomics.
TMF Jeff: "Proteomics" is the study of proteins.
TMF DavidG: Directing their computer power at figuring out what genes lead to what proteins, and how those proteins lead to your height or someone's terminal disease, that's the key.
An audience member asks: Should I buy biotechs through a mutual fund -- a biotech fund?
TMF Jeff: Typically, Fools frown on mutual funds. But, David, your thoughts?
TMF DavidG: The answer in many cases can safely be, "Yes." The key with mutual funds is to keep your eye on their expenses AND their turnover rate, because that's the way you'll be "paying" for holding the fund. Many people don't even think of themselves as paying for a fund, but we do -- whether it's through loads and/or annual expense ratios (the S&P 500 Index fund charges 0.25% or less, the average fund charges 1.7%) and, importantly, how much those assets are turning over every year, which leads to capital gains taxes for you and me. So, make sure you check out a fund's load, expense ratio, and turnover ratio before buying one.
But, the reason this can work pretty well for biotech is that you're making a "sector play," investing your money with expectations that this sector will do well, and I can find few more exciting sectors... in fact, I can't think of a more exciting sector.
eagledancer888 asks: Do you see Amgen acquiring other biotech companies in the next 6-18 months?
TMF Edible: Yes, how hungry is Amgen?
TMF Jeff: I do believe that we'll see more acquisitions, rather than fewer, over the next 18 months. But, my thoughts actually contradict that notion, somewhat. I think if bioinformatics proves as powerful as is hoped, companies like Amgen will have fewer reasons to acquire other companies, because Amgen will have its hands full already, with new discoveries and pursuing those.
TMF DavidG: My own take on that questions is: Why would you be asking? From an Amgen shareholder standpoint, I don't find it that meaningful either way. It might matter to the acquisitions, of course, but not to an Amgen shareholder. And, we would certainly not suggest any investor buy a smaller company just in hopes of a buyout. We prefer to buy strong companies with great prospects.
TMF Jeff: Johnson & Johnson (NYSE: JNJ) is a large company probably more likely to acquire biotechs than Amgen, in order to create new pipelines, as it did recently. Maybe we'll see more of that from Merck (NYSE: MRK), Pfizer (NYSE: PFE), and other large pharmaceuticals that want a bigger jump start into genomic discovery, too.
TMF DavidG: That may be true, Jeff, yes.
TMF Edible: Our next question concerns Rule Breaker Portfolio management.
jazzman263 asks: Are there any plans to adding to Celera holdings?
TMF Jeff: David, are you going to throw mo' money in Celera?
TMF DavidG: No.
TMF Jeff: Short and sweet.
TMF DavidG: We usually don't add to our initial investments as we prefer to find additional, new companies. Right now, our portfolio only has seven stocks, so we're looking to diversify a bit more.
TMF Edible: Next question is a poppa of a question.
drinkcoke75 asks: I spoke with a friend who is a nurse this afternoon about Celera, the Human Genome, et al. Her response: "Hype hype hype. Human systems are remarkably the same. Drugs work pretty much the same on all people, you just give a little more to that guy in Blues Traveler. So, finding out every person's individual DNA isn't going to mean that much in the end." What do you think, gents?
TMF DavidG: I think that's a fantastically misleading statement. First of all, even if it is true that we all were pretty much the same, she's looking at things on a macro level, but aren't you and I pretty interested in ourselves on a "micro" level? In other words, wouldn't you like to know if you're going to be getting Huntington's Disease at the age of 64, which only your genes can tell you? The amount of insight into our personal selves obtained by the genomic data is astounding. I would test her by asking her to sign a waiver that says, "I promise I will never check my own genomic data. Signed, Nurse." Bet she won't sign it. She'd be crazy to do so. :)
TMF Jeff: Plus, drugs do have differing adverse reactions in different bodies, actually.
TMF Tardior: We appreciate the Blues Traveler reference, though.
rock1356 asks: David, how long are you willing to wait for a company like Celera to become profitable?
TMF DavidG: :) Great question. I personally will wait for a length of time that is proportional to the amount of potential profit I see. So, with Celera, Amazon.com, and AOL in the past, I was willing to wait longer than for, say, drkoop.com (Nasdaq: KOOP). :)
preppyalternaboy asks: In the PBS special, Haseltine of Human Genome Sciences argued that drug companies would make the big money, not the info-gathering companies. Does this make sense, given the amount of research and effort it takes to bring a drug to market?
TMF Jeff: That's a good question, too. I feel that it is silly for Dr. Haseltine (as much as I like him -- I have had the opportunity to meet him and spend an entire day with him at work) to claim to know what will make money and what won't this early in the game -- although, obviously, successful drugs will make money. Most importantly, to answer the question, I don't see this as an either/or situation. Bioinformatics (what Celera is selling) stands to be a large business, and creating drugs from that information obviously stands to be a large, excellent business, too.
TMF Edible: So, Jeff, if Haseltine goes to work for Celera, you think his tune would change? And Bioinformatics -- that's a great name for a West Coast punk band.
TMF DavidG: I think "proteinformatics" will be extremely profitable -- where's that mentioned?
TMF Jeff: Overall, both businesses (drugs and genomic information) feed off one another and both stand to create value.
TMF Tardior: Do you think Celera should be patenting more, a la HGSI?
TMF Jeff: Celera is very deliberate in filing its patents -- very purposeful and detailed -- so, I believe in the long run it will have a powerful patent portfolio, the law willing (as it should be). HGSI has an excellent patent portfolio (and much larger right now), too.
Next: Part 2 »
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