"Why don't you come up to the lab, and see what's on the slab?" -- Dr. Frank N. Furter, The Rocky Horror Picture ShowRule Breaker investors are on the way, Doc! We haven't had enough of biotechnology stocks, and we want more.
Yes, the RB Portfolio already owns two companies that use biotechnology in their businesses: Amgen (Nasdaq: AMGN) and Celera Genomics (NYSE: CRA), and it's looking into Human Genome Sciences (Nasdaq: HGSI) and Millennium Pharmaceuticals (Nasdaq: MLNM). But, there is more than one biotechnology industry -- many industries, in fact. Never satisfied, Fools query: What are they? Are any of them "emerging and important"?
Just asking those questions puts you on the noble path, heeding Wired Magazine writer Brian Alexander's warning that the "arcane nature of the [biotechnology] business means most people don't know what they're buying." (Ditto Fool AWSJR in this cautionary post on the Rule Breaker Companies discussion board.)
So, pat yourself on the back -- you deserve it! Even if we don't find one more single solitary Rule Breaking biotech industry -- which I doubt -- we will learn about biotechnolo-gies. If we then decide to invest in biotechnology, we'll be more Foolish, buying what we know.
Three Keys to Finding Biotech Breaker Industries
1. Take the biotech crash course.
In the Biotech Crash Course, Motley Fool Research analyst Zeke Ashton zeroes in on a quick way to get started in the exciting biotech era. He fingers books, articles, Foolish content, and some biotech reports on Soapbox.com that he finds useful. This has been the start of my Foolish biotech investing education, and I strongly recommend it. Another good source is the Biotechnology discussion board, with its helpful FAQ.
For those of you who like a more standard educational format, we will be offering a five-week Biotech Seminar, starting in mid-October.
You will find all sorts of biotechnology industries and immerse yourself in the lingo. One must-read for any bio-de-tech-tive is Cynthia Robbins-Roth's book, From Alchemy to IPO. Robbins-Roth, Ph.D., was a scientist at Genentech (NYSE: DNA) in its early days. Today a biotech writer and consultant, her story of the field reads like a novel. For us, a main benefit is that she groups companies by biotechnology industry and also by research focus, with easy-to-understand explanations. This helps if you, like me, were an average student in "Biology for Non-Majors" 25 years ago!
Robbins-Roth also provides a flock of resources, including the online Signals Magazine, edited by her former business partner, Jennifer Van Brunt. Signals also sorts 273 biotech companies into 17 handy categories.
273 companies in 17 industries? We're talking possibilities!
2. Make a list of some of the biotech industries you find.
When many people say "biotechnology," they really mean biopharmaceuticals -- drugs. A Foolish Checklist for Biotech Investing, for example, assumes we're talking drugs. Why? Because that's where a lot of money is: The patent protection -- the right to a legal monopoly -- that goes with a successful drug means high margins and profits. Drugs are must-repeat purchases. Favorable baby-boom demographics ensure an increasing market for them.
So, OK, there's money in drugs, and we're all over them. Three of our Rule-Breaking biotechs or biotech candidates make or develop drugs: Amgen, Human Genome Sciences, and Millennium Pharmaceuticals.
But, there is biotechnology beyond drugs -- witness RB Portfolio holding Celera Genomics (NYSE: CRA), the top dog in bioinformatics. Yet, bioinformation is not the only crucial part of the biotechnology revolution in drug development and individualized medicine. Let's look at some others.
Grow your own organs!
Or, more soberly, tissue engineering and cell replacement, biotissues and materials. We're talking about biotechnology to stimulate your own cells to grow new organs -- from skin, bone, and teeth, to liver, bladder, pancreas, and spinal cord nerves. Or, making your body produce missing enzymes. Some companies: Advanced Tissue Sciences (Nasdaq: ATIS), Biomatrix (NYSE: BXM), and the clearly named Organogenesis (AMEX: ORG).
Chips off the old gene
OK, great: Celera and the Human Genome Project, as well as other companies, have provided us with Everests of genomic information. Now what? Robbins-Roth emphasizes:
"The Human Genome Project is all about determining the linear sequence of DNA bases in our chromosomes, the code for every protein in our bodies. But, this project can easily become a source of information overload. There are an estimated 100,000 genes in each human cell."How do you know if you have a particular one of those 100,000 genes? How long do you think it would take to test for its presence? What if you want to test a zillion compounds on DNA itself? Called gene chips, DNA chips, bioarrays, or microarrays, these devices allow a researcher to place DNA samples on them and to signal whether a particular gene is present. The more advanced, the more genes that can be tested on the microarray -- usually a glass slide or chip the size of a dime.
According to Robbins-Roth, "Without a tool like microarrays, scientists would have no hope of finding the correct genes to study for any particular disease." No hope (And I don't mean Bob Hope's son). Talk about a must-have for the genomics era!
Companies in this field include pure plays Affymetrix, (Nasdaq: AFFX), Gene Logic (Nasdaq: GLGC), and Hyseq (Nasdaq: HYSQ), but also some very big diversified guns, such as Agilent Technologies (NYSE: A), DuPont (NYSE: DD), IBM (NYSE: IBM), and Motorola (NYSE: MOT). Among other things, these powerhouses eye the ways that DNA can advance semiconductor design. I'm stopping there and moving on, before I show more ignorance.
The mad chemist
Let's say you're a drug maker. You have a vast amount of genetic information, perhaps thanks in part to your database subscription from Celera or Incyte Genomics (Nasdaq: INCY), for example. After consuming a heap of microarrays along the way, you've identified a disease target, perhaps, using Robbins-Roth's strong example, the enzyme responsible for letting HIV continue an infection. To find a drug that will stop that enzyme, you toil repeatedly, tirelessly, with myriads of drug compounds to find ones that work. They must be easy to ingest, not toxic, and so on. Some companies use chemistry, biology, and software to streamline the process -- to reduce cost and increase chances of success. They include Albany Molecular Research (Nasdaq: AMRI), ArQule (Nasdaq: ARQL), Pharmacopeia (Nasdaq: PCOP), and Symyx Technologies (Nasdaq: SMMX).
That's a good start. Maybe these are Rule Breaking industries, but maybe not. Time to dig deeper.
3. Ask yourself the tough questions.
Then put your thinking caps on. Is this an important, emerging biotech industry?
What's the potential? How high is the ceiling? We're looking for Rule Breakers, not niches -- though you may find a wonderful investment in a very profitable niche.
So, imagine. Walk the beach, get comfy in that easy chair. Could a Rule Breaker in this business grow into a Rule Maker? If you can see that future, this may be an important, emerging industry with Rule Breaker candidates to put through the RB paces.
Then, take some of the biotech industry lists you find and write down the individual companies that the list-makers identify. Because no two Fools are likely to agree on the biotechnology industries and companies in them, nose around company websites. If they can't make their businesses clear there, that should raise a red flag. Then, check the latest 10-K, which is required reading for the company's business description. Also note the companies identified as competition. By then, you'll have a good idea of what companies belong in which biotech industries.
Pretty soon, you'll have an industry and the players, and you can apply the Rule Breaker criteria.
This is talking the talk. What I really want to know is (why do I sound like Holden Caulfield?), should we walk the walk? If you're interested, I could be back picking apart these and other biotech businesses with you to learn whether they really are important, emerging biotech industries. Please let the RB Port know in this poll:
- The current RB biotechs of Amgen, Celera, and the two candidates are plenty. Leave Dr. Frank N. Furter alone in his lab, thank you very much! I'm full!
- Yes, I'm interested in more biotechnology Rule Breakers, but let's stick to drug companies, please.
- Hey, bring on the DNA chips, chemists, and replacement organs! This could be profitable!
- I'm really game. Don't stop at the three you've identified; check out more biotech industries to see if they are important and emerging.
- Just visiting!
Tom Jacobs, TMF Tom9 on the Discussion Boards