First up is Zeke Ashton, a Motley Fool Research writer who covers Amgen and writes for the Rule Maker Portfolio. Zeke has also written a Biotech Investing checklist for Motley Fool Research.
Zeke Ashton: The one thing I believe most people don't know, or maybe I should say don't appreciate, is that despite all of the hype and hoopla surrounding the mapping of the genome and all the new biotech-derived drugs, we are still so early in this ball game. When you consider how many companies are looking at the new genetic information databases that weren't available even a couple of years ago, and that scientists are only now beginning to unravel that information, one can only be awed by the potential of this field. But, biotech is truly a long-term endeavor. Since it takes a decade or so to get a drug to market, we won't be seeing the newest technologies being applied now in therapeutic settings for many years. When you consider that even the latest FDA approved drug is actually probably 15-year-old technology, one can only wonder at what will be coming down the road in the next several years.
TMF Jeff: Next is Greg Carlin, who is a patent attorney and a Soapbox writer.
Greg Carlin: Investing in biotechnology companies is like steering a giant oil tanker. You have to look very far ahead and not overreact to any bit of news, or you will run aground. Developing a marketable drug takes about five years of preclinical testing (tickling little cells in a dish with the drug to see what they do), and 10 years of clinical testing on humans. Therefore, it is important to look where the company is going to be a LONG time from now, not where it is here and now. The company should be spending lots on research, have plenty of preclinical and clinical trial candidates -- I call this "building a base." Once the base is built, it is almost an advantage to the investor that the company not have any drugs on the market -- this will allow a massive increase in value if and when the first drug is approved and hits the market. We can call that base jumping. Of course, base jumping takes a lot of courage, too.
TMF DavidG: Following up on Greg Carlin's point: That is why I go back to the resources these companies bring -- because I CAN project Amgen out about that far (10 to 15 years) and feel comfortable. Amgen has a $70 billion market cap and a heck of a lot to spend every year on research.
TMF Jeff: Next, Fool Dave Featherstone, who is a research biologist, answers our question "What is one thing that you believe most people don't know about biotech -- and should know?"
Dave Featherstone: Actually, a method/process for "thinking about biotech" is exactly the subject of the Soapbox article I'm working on, so I have thought a lot about this lately. I feel strongly that the answer is very clear. The problem has even been highlighted by the media lately, who admit to contributing to the problem. The major pitfall for biotech investors is hype.
Progress in biotechnology, like many science-driven pursuits, is incremental and even agonizingly slow compared to the rapid pace of engineering-driven industry. This is particularly true for anything medical or food related, since these products must undergo drawn-out clinical testing and/or regulatory approval. Individual researchers and companies rightfully celebrate milestones along the long road to a final product, but often this progress is overinflated or (worse) misinterpreted by the media and latched onto by a hopeful public.
Don't get me wrong; I believe firmly that biotech is a sector whose earnings are going to increase exponentially, driven by recent advances in molecular physiology, genomics, and bioinformatics. But, the Foolish investor will avoid the hype and do careful research. Profits in biotech come the same way as in any other business: The company has to provide a good product or service and sell it to a lot of people. Investors should always ask themselves, "What are this company's products? Who are they selling to? How much more are they likely to sell?" The ability to cure cancer doesn't make a good company. The ability to SELL that cure does.
TMF Jeff: Bart Janssen is another Fool community member who also works in the biotech industry and is a Soapbox author on biotech.
Bart Janssen: I'm gonna cheat and give you two things biotech investors should know, but they are related. I think one thing most people don't realize is just how much we still don't know -- especially in biology. It's tempting to imagine that once we have the genome sequence and do a couple more experiments, we'll know all the answers. But, it just ain't so. We have a huge amount to discover, and we now have the tools to do that discovery. That is what the science and business of biotech is all about... discovering the unknown that is life.
Which leads me to the second thing people don't understand about science in general and biotech in particular: Science is a team sport. Successful science comes from teams of creative people. Successful biotech companies come from well-led creative teams. The image of a lone scientist crying "Eureka!" is false. Progress is made by teams of skilled and talented people working together.
Finally, throw away any thoughts of one good idea making a biotech company. What you need is a constant stream of discovery, and that will only come from a talented, creative research team. As investors, our aim should be to learn how to identify the most creative and talented teams, or the companies that put together those teams. When you give a great team the job of discovering the nature of life itself, and give them the tools to do it... then look out... because the world will change.
TMF Jeff: To wrap up, we want to share the basics of a biotech Investing checklist that Zeke Ashton created. You can read the full article in Motley Fool Research, but the summary criteria Zeke believes you should demand from traditional biotechs are:
TMF DavidG: One reflection as we close is that this list speaks to the idea of a Rule Maker world. Most of the companies that match it are the big ones. We will see lots of Rule Breaking going on in biotech. Not every superstar will conform to that checklist, but if you're new to the industry that's a very good guide. And, if you invest in companies that do NOT conform to that checklist, just realize that you should be very well-educated and very interested in the subject overall, and the company you're investing in, in particular!
TMF Edible: Great advice!
TMF Jeff: Fools, if you have more questions, visit the discussion boards at the Fool, including the Biotechnology Board.
TMF DavidG: And thanks for all your questions.
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