The biotechnology world is as varied as foliage in a rain forest. You have your choice of investing in drug makers, data sellers, diagnostics companies, tool and gene chip producers, and even laboratory providers. We're most interested in drug makers, as evidenced by our investments in Amgen (Nasdaq: AMGN) and Human Genome Sciences (Nasdaq: HGSI).
Celera (NYSE: CRA), as top dog in bioinformatics, looked like too much of a Rule Breaker in 1999 for us to pass up, so we bought it, too. Since the beginning, though, we've hoped that Celera would become involved in more than data. Therefore, we applaud the recent company-endorsed notion that Celera will eventually profit from drug development in some form, too.
Drugs are king
We focus on drug makers because, despite the high costs and risk, we believe drugs will continue to create the most value among all biotechs, even in an age growing rich with biotech data and amazing machines. Drugs have long created the most shareholder value in the industry, and this trend continues today. The most promising biotech drug companies -- even those without any drugs on the market yet! -- command larger market values than any of the data providers.
We spoke with Dr. William Haseltine, Chairman, CEO, and founder of Human Genome Sciences this winter. His company is involved in databases, drug development, and diagnostics, so we asked him where he believed the most value would be created in the biotech industry in the next ten to twenty years.
Dr. Haseltine replied, "The most long-term value will be made from products that can be sold to a broad consumer base: drugs, food products, and probably individual health services. The greatest value lies here. Investors should be more cautious of companies that only have scientists or other scientific companies or institutions for a customer base."
He continued, "The power of modern technology is to reach deeply into the consumer base, reaching millions of individuals."
So, over the next few decades, "Drugs will most likely have the highest profits," Dr. Haseltine concluded. "Diagnostic tests linked to new cures will be lucrative, too. Then new [biotech-related] food and health services that reach most consumers individually -- that reach deeply into the consumer base."
HGS' 2000 results
Human Genome Sciences announced year-end results on Thursday and Tom Jacobs covered the story in Fool News. The company struck the iron while it was hot in 2000, raising so much money that it now has $1.8 billion -- enough to last an estimated nine years. The company's first drug, with continued good trials, should be on the market by 2005, and it could be a blockbuster seller. HGS is trying to develop only blockbusters (meaning $1 billion sellers), unlike most biotechs which also pursue moderate success possibilities.
Human Genome's 2000 revenue was $22 million compared to $24 million in 1999. Data sales have been on hold while old contracts expire. This year, HGS is reselling its database, ideally at higher prices. I have a call placed to the company and will update you on the situation. Since the beginning, HGS has been exceptional at selling data on a royalty basis -- meaning, for drugs developed on its data (for which it is also paid), it stands to receive an additional 7% to 10% in ongoing royalties. That sort of arrangement sets HGS well apart from its peers.
HGS presents a very long-term investment scenario, and it isn't surprising to see the stock bounce up and down in the meantime ("meantime" being several years). The company is still being afforded a strong valuation. This year, we want to see its four drugs successfully move ahead in trials, and more lucrative and smart sales and partner contracts signed. HGS did a good job summarizing 2000's progress.
Know your companies
For each company that I own, I'm creating a small "one-page" like the one below. I believe that most investors can benefit by creating such a page for each company owned. It needn't be complex. It just demonstrates that you know why you own what you do, and it reminds you of your expectations.
Following is an example "one-page" based on Amgen (if you create and save these pages online, you can utilize links and make your future research and knowledge-upkeep much easier):
- Amgen's Mission Statement: "To be the world leader in developing and delivering important, cost-effective therapeutics based on advances in cellular and molecular biology."
- Amgen's corporate goals and values.
- How Amgen makes money: Strictly through the sale and licensing of biopharmaceutical drugs. It has two blockbuster drugs, Neupogen and Epogen.
- How Amgen makes more money: Amgen must bring new, significant drugs to the market on a regular basis. Therefore, we follow its drug pipeline closely.
- In one sentence, why Amgen is a Rule Breaker: Amgen is the absolute top dog (most valuable) company in the biotechnology industry.
What we, the RB managers, must see from Amgen:
- Promising drug products advancing through clinical trials on a steady basis.
- Reinvention of current blockbuster drugs to refresh their product patents and increase usefulness (this is going very well).
- Continued honesty in all operations and accuracy in management's guidance for expectations, mainly given in quarterly conference calls.
- Average increases in research and development spending of at least 12% annually.
- Average long-term earnings per share growth of above 12% annually.
More in-depth resources:
- Rule Breaker Amgen buy report (12/15/98)
- Motley Fool Research Guide to Biotech Investing (the best, most comprehensive guide to biotechnology investing that I've ever seen -- if you don't agree, get your moola back!)
Have a Foolish weekend!
Jeff Fischer is ready to admit that his genes are hardly different from those of a fruit fly. To see the stocks he owns (do you really want to?), view his profile. The Fool is investors writing for investors.